Good and not-so-good debt: What’s the difference?

Posted in Credit, Credit Rating, Debt, Debt Counseling, Finances | Comments Off on Good and not-so-good debt: What’s the difference?

If you use credit with good judgment and with a solid plan to pay it off, you stand a good chance of profiting from the funds you borrowed. It’s important to remember that when it comes to taking on debt, you should approach the decision carefully and only take on debts that will grow your financial worth and/or positively affect your life. The best way to know how to control debt — along with most things in our lives — is to look before you leap. Be sure to ask yourself if the credit is necessary, what will it involve, is there a better way to get what you want than by incurring this debt and how fast will you be able to get rid of it. For example, ask yourself:

• What is its purpose, i.e. the long-term goals and benefits you will achieve as a result of taking on the debt?
• How you will pay it back?
• And, where it fits within your cash-flow budget?

One way to ensure that taking on new debt won’t be an issue for you is to understand the difference between good debt and not-so-good debt.

Good debt generally has the following qualities:

• It is taken on for something that will likely not lose value over time
• It will leave us better off in the long-term and provide us with lasting and, with luck, ever-increasing benefits
• The debt will not have negative consequences on our present and near-future overall financial position
• It will help us manage our finances more effectively
• It will help leverage your wealth
• The debt is used in a responsible way, with details carefully thought out and with the long- term view in mind
• There is a clear and specific reason for taking out the debt
• There is a realistic plan for paying back the debt as quickly as possible
• The debt was obtained through the cheapest and most effective borrowing method available, with the most reasonable interest rate, term and charges

Not-so-good debt has the following features:

• It feels like free money
• It often provides some form of instant gratification
• It will not provide some increase in value to us over time
• It reduces your wealth or offers no opportunities to grow wealth
• It keeps growing, because of the interest rate and supplementary charges
• It seems like it will never be paid off
• It may have an unrealistic repayment plan

How to stay out of debt

The fact is that no matter how much our financial life may have jumped the rails, you always have the power to get it back on track, regain control and avoid debt situations like bankruptcy. You’ve also seen how much of a role our attitude plays in grasping that empowerment. Seeing the glass to be half-full rather than half-empty can make all the difference in the world. If you can manage your credit wisely, you can enjoy the many benefits it offers. As you know, it can be a very useful tool by helping you accomplish important life goals, boost your net worth over time and enhance your quality of life, just so long as you remain the one in charge.

The next logical question likely is: “What can I do to make sure that I do remain the one in control of my debt?”  Of course, the short flippant answer is: don’t borrow. But as we’ve already seen, there are times that taking on debt will be necessary. The majority of us may see abstention as too lofty a goal. It can be done, but very few of us will be in the envious financial position of having the money to satisfy all our needs, and our wants, without borrowing. The trick will be to manage it properly and not allow it to take control.

Consider sticking the following reminders to your fridge to help keep you on the straight and narrow in 2019:

1. Best way is to stay out of debt completely, don’t borrow full stop. But some are not avoidable:
   • Mortgages
   • Car loans
   • Student Loans
   • Impulse — clothing, food, entertainment
2. f you actually need to take on some debt, what is it that you are trying to accomplish?
   • Have a plan – this is the goal of how you’ll pay of the debt
   • Develop good habits and stick to positive financial routines
   • Most important, learn to manage your cash flow
   • Create a simple cash flow spreadsheet or table; this can also be done through money management software like Intuit Quicken or MS Money
   • Make tracking your money an automatic process; enter and update your transactions regularly
3. Remember, when it comes to tackling your debt:
   • Be honest with yourself about what went wrong
   • Make a decision to tackle the problem
   • Seek professional advice to understand your options; remember, you’re not alone, keep your pride in check
   • Accept the reality of the situation and stay positive
   • if it becomes too much for you to handle, never be afraid to consult with a debt expert or professional.

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