Good debt vs. bad debt

Good debtMost of you might be confused between the two notions of good debt and bad debt. First of all the meaning of a debt must be made clear. Debt is something that a person is bound to pay back. But there is a difference between good debt and bad debt.

Good debt is something that the person cannot afford to pay up-front but he has the money to pay it up on a scheduled date as in home equity loan or mortgage. Bad debt is something that the person cannot afford to pay as he has not saved enough money to repay the debt and hence he has to apply for a loan.

The most usual and common form of bad debt is known to be the credit card. They should be used with utmost care. The best way to prevent yourself from getting into a debt after using your credit card is to pay it off as soon as the bill arrives. This will show to the companies that you are a responsible customer. The other examples of bad debt are personal loans and cars. It is better to buy a used car and maintain it for one or two years instead of buying a new car that depreciates with time.

The best examples of good debt are business loans and mortgage. Anything that is borrowed and can be measured in monetary terms can be a good debt. The value of the car depreciates and its value is always less that what you had bought it for. Student’s loan is another example of a good debt as it helps you to attain higher education and hence have higher income in terms of job. This money can be used to pay off the loan.

Bad debt has no value or its value tends to decrease over time whereas good debt tends to increase the value over time.