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The Difference Between Good and Bad CreditThe harsh reality is that the average American household is carrying at least one credit card and has a debt of around $9,000. Even worse, the average interest rate on these credit cards is in the mid to the high teens. This translates to a loss of hundreds of dollars every year to finance charges. Nonetheless, there is a difference between good debt and bad debt and here is a look at that difference.
Bad Debt
Of course, being in any kind of debt is not a desirable situation. But, there are certain types of debt that are worse than others. Credit card debt leads the pack when it comes to debt that is bad. This is mostly because the of the high interest rates associated with credit cards. For this reason, it is essential for a credit card holder to pay off the balance on his or her credit card at the end of each billing cycle. If you can’t afford to pay the expense off within a month or two, you should avoid putting it on your credit card. This is particularly true for things that get “used up” quickly, such as a vacation or going out to eat. Save up for these little extras and enjoy them once you have saved the money rather than paying for them with a credit card and dealing with the resulting finance charges.
Good Debt
Believe it or not, there are certain types of debt that are considered good. For example, borrowing money in order to pay for your college expenses is good debt. After all, once you have that degree in your hand, your earning potential will increase significantly. This makes the interest paid on the loan worthwhile.
The same holds true with a house. Going into debt in order to pay for your home is generally a good investment. First of all, many house payments cost no more than what you would pay to rent a home or apartment. Secondly, you will build equity with your home and, ultimately, your home should bring in more money than it cost you as its value increases. Just be certain that you do not borrow more than you can afford to pay back. Otherwise, you will risk losing your home and your investment.
Reducing Bad Debt
In order to gain control of your finances, you need to work toward paying down your bad debt. This requires taking a closer look at your spending habits and cutting back on buying the things you don’t really need. This extra money can then go toward paying off your debt. When choosing the debt to tackle first, you should work on paying the debt with the highest interest rate first. That way, you reduce the amount of finance charges you are paying. Also, try to send more than just the minimum monthly payment to your credit card. The minimum payment really just covers the finance charges. In order to get ahead, you need to work on paying down the principal as well.
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