What’s The Difference Between Good Debt and Bad Debt?

Good debt can be a valuable tool in your financial arsenal. It can help you make large purchases like homes a reality, as well as be used in investing, which will ultimately increase your wealth and improve your quality of life. But how do you tell the difference between good and bad debt? In this article, we’ll cover the differences, and explain what to do if you have too much bad debt.

What is good debt? 

Good debt is debt that has the potential to build wealth.

This means that it allows you to invest in assets that can increase in value and grow your net worth, such as real estate or education. Good debt can also be used to purchase income-producing investments, such as stocks and bonds. These are all ways in which you can use good debt for your benefit by growing your wealth over time.

Good debt is a powerful tool for building wealth and increasing your net worth. When you take on good debt, you’re investing in something that can increase in value over time. This could be a house, an education or starting a business. You’re not buying the home for its current value; instead, you’re buying it because you think it will increase in value over time through appreciation and inflation (or other factors). In this way, taking out a mortgage is like making an equity investment into your home—the more valuable your home becomes, the more money you’ll make on top of paying off what was borrowed. Similarly with student loans: they help pay for tuition so that later on down the road when those students graduate they can possibly get higher paying jobs and pay off their debts more easily. 

What is bad debt?

Bad debt is any kind of debt that doesn’t help build your wealth or create a better financial future for yourself. 

This type of debt includes credit card debt, payday loans and other high-interest, subprime loans. Bad debt is a financial burden. It can cost you money in fees and interest charges — even if you aren’t paying any principal on the loan. For example, if you have $10,000 in credit card debt at 15% interest rates and make only minimum payments every month for three years (30 months), then at the end of 30 months your outstanding balance will still be $10,000 but it’ll also add an additional $3,938 interest charge to your bill! 

Add to this the fact that most people don’t even pay off all their purchases on their credit cards when they make them; this means even more money going into the bank accounts of big corporations while consumers are left with more bills than ever before!

Whether your debt is good or bad depends on how it impacts your finances in the future. 

Although most types of debt have pros and cons, some have a greater impact on your long-term financial health than others do. Good debts may help you build assets or improve your credit score for future lending opportunities, while bad debts cause you to lose money in fees and interest charges or put important assets at risk like jewelry or your home.

The term “bad” tends to evoke negative emotions when applied to money, but technically speaking all types of debt are considered legal loans—you’re just not paying back what you owe with cash. Bad debts are those that don’t benefit you financially in the way that good ones can: they don’t gain interest; they don’t increase in value over time; they aren’t secured against something valuable such as real estate; or they come with penalties if paid late or early.

What to do if you have bad debt.

Now that you understand the difference between good debt and bad debt, it’s time to talk about what to do if you have bad debt. Unfortunately, there is no one-size-fits all solution for everyone. Your financial advisor can help you determine which option is best for your individual situation.

However, one possible option is debt consolidation, which allows consumers to combine multiple debts into one new loan with a lower interest rate and longer term (typically 15 years). With this option, you’ll pay off all of your current balances with the funds from the new debt consolidation loan — once that happens, it can provide some relief from having multiple payments due every month by simplifying things to one singular, lower rate payment.

Another alternative is debt settlement. Debt settlement is a process in which you work on your own or with a debt relief agency, like ACCS, to negotiate an agreed-upon payment plan or lump-sum payment with your creditors.  This can help reduce the amount of money that’s owed by hundreds or even thousands of dollars depending on how much debt is involved. When working with an agency, they negotiate with creditors on your behalf, and in return for their services they will charge a flat fee or percentage of the total amount you owe. The primary benefit of debt settlement is that it allows people who are struggling with credit card and medical debt to get back on their feet quickly. However, it’s important to understand the pros and cons of this option before you decide whether or not it’s right for you.  

The bottom line is that you should always try to pay off any debt as quickly as possible, but it’s important to know the difference between good and bad debt so you can prioritize what you tackle first. If you’re struggling with a large amount of bad debt, consider talking with an ACCS debt specialist about your options to pay it off. Request a Custom Debt Relief Plan today!

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