Understanding good debts and bad debts
The good news is certain types of debt are good for you, are factored into the monthly budget, and won't hinder you from saving. However, the bad news is certain types of debt won’t do you any good, must be paid off as fast as possible, and will prevent you from saving.
Obviously, you’re not planning to pay back your whole mortgage before you can start saving for your kid's college, unless you want to put your children in the college after their hair turns gray. You may also want to prioritize on your car payments, which should be factored into your monthly budget as the transportation cost.
Although you have finished paying off your loans for children's education, vehicle and house, they will still have a value to you. If viewed from the creditworthiness standpoint, many credit-rating companies assume that you have a debt or two, then the fact that you own these kinds of debts will make you more appealing as a potential borrower than people with no debts at all (surely, provided that you always make your payments on time). A good debt is a debt that you budget for, plan for, and manage properly.
On the flip side, your credit cards (if you have unpaid balances), your layaway accounts, your rent-to-own accounts, and all the so-called consumer debts are viewed as bad debts, which should be reduced or completely eliminated, if possible. A consumer debt is cash that you've borrowed to buy either consumable goods (like groceries) or things that have short lifespan (last year’s cell phones; that perhaps, your children won’t use because they are no longer fashionable and up to date). Basically, after you purchase things included in these categories, they may no longer have any real value.
Of course, you don't have to stop buying clothing or food, or even a new plasma TV. You do need to drink and eat though, and watching TV is still a relatively cheaper form of family entertainment. What you should not be doing is securing a loan to satisfy your wants instead of your needs. And that is actually what people did when they carry enormous balances on their credit cards. You are not only paying a small amount of interest on last night’s takeaway, but you may still have to pay for last year’s vacation and your lavish wedding party from five years ago.
However, if you want to dig yourself out from a deep pit of financial turmoil, you should also break yourself of any bad credit card habits. Stop thinking that, just because there is still credit available, then you can feel free to spoil yourself in everything that crosses your path. If you can’t pay your cards off in full every month and use them responsibly, it’s the right time to make plastic noodles. Diced and sliced credit cards in a small glass bowl may make a cute focal point in your living room, and they will also serve as a strong reminder of spending habit run amok.
tags: understand, good debt, bad debt
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