Debt is a troublesome word for many of us. It’s a word that often leads to negative feelings and emotions. After all, nobody likes the idea of owing someone else money, especially when it can cost us hundreds of dollars every month to pay them back. Fortunately, there is a concept of good versus bad loans. After all, borrowing money can be a positive thing when used correctly, but it’s far too common to see people misusing credit. This is what leads most people to see debt as a negative thing in life.
But debt is an important component of life that shouldn’t be underestimated or misrepresented. Debt can help you achieve great things in life such as study at a good school, help you pay for a car, and even assist in the purchase of a home. These are examples of good debt that we can all expect to experience at some point in our lives. But what about bad debt? What does it imply and can it be avoided?
What is bad debt?
Bad debt is generally considered any debt that is used to purchase something unnecessary. For instance, if you take out a loan to buy the latest video game console for yourself, then you’re engaging in bad debt because that purchase isn’t necessary. As another example, paying for a cable television subscription or video-on-demand service can be considered bad debt if you use a credit card. This is because these services aren’t necessary for your wellbeing and there are alternatives that you can rely on instead.
In other words, if you’re spending credit on something that isn’t necessary for your growth or wellbeing, it’s likely something that is considered bad debt.
What if I already have bad debt?
Balancing good and bad debt is important, but what if you already have bad debt? What can you do in that situation?
For starters, it’s a good idea to focus on saving money and reducing your reliance on credit. Maxing out credit cards and living paycheck to paycheck are clear signs that you need to change the way you view money. You may also want to consider debt consolidation programs to try and reduce the amount of bad debt that you owe. This can be a great first step to take when reducing the bad debts that you owe.
What about purchasing a car? Is that bad debt?
A car loan can be considered both good and bad debt. This is a great example of a purchase that falls in a grey area. On the one hand, a car isn’t necessary if you live in a city or have public transportation options available. However, a car is important for ferrying around family members and could be an essential component of your daily life, hence why it’s a worthwhile investment and considered good debt.
You’ll likely come across many different cases where debt can be considered good and bad to some degree. However, as long as you focus on the question of “do I really need it?” and only go into debt for necessary purchases, you’ll have a much easier time keeping your financial situation healthy.