Financial Leverage: What Is Good Debt vs Bad Debt?

Debt consolidation involves strategies to help offset some of the expense of the debts (such as balance transfers). For example, you could plan to consolidate your debts into a single loan with a lower APR. If you have a lot of debt to pay off, it can be overwhelming to decide how to prioritize repayments. There are a few approaches you can take to help you tackle these debts. Or consider the debt avalanche method that suggests starting with debts with the highest interest rate, which can save you more money in the long term. This is why people always focus on paying their mortgage first.

These kinds of loans are seen as wealth-building investments and establish you as a reliable borrower (a win-win!). For example, credit card debt is often considered bad debt. However, you won’t have to pay interest on your purchases if you pay your credit card bill in full each month. You also might get a card that has a 0% intro APR offer and you can pay off your purchase over time without paying any extra fees or interest. Debt that doesn’t accrue interest generally falls under good debt.

• Good debt tends to be debt that allows someone to achieve meaningful personal goals or could lead to long-term financial gain.
• A joint loan is a loan shared between two people who apply together.
• Travis loves spending time on the golf course or at the gym when he’s not working.
• Bad debt, on the other hand, often carries high interest rates and strict terms, making repayment more difficult.
• You want to ensure you can make your monthly payments at a minimum.
• Bad debt generally lasts longer than the things you acquired by taking it on.

One option is to put a small recurring payment, like Netflix, on a card you aren’t using otherwise to keep it open and active. However, make sure you are paying off that charge each month. Good debt tends to be debt that allows someone to achieve meaningful personal goals or could lead to long-term financial gain. You are now leaving the University of Hawaii Federal Credit Union website. The University of Hawaii Federal Credit Union (UHFCU) does not control the security or privacy practices used at the following website.

How to use good debt as financial leverage to achieve your financial goals

• Understanding the difference between good and bad debt can help you make informed financial decisions.
• I am a former financial analyst and investment manager who has changed gears to focus on improving financial literacy.
• If you’re still learning about what separates good debt from bad, these frequently asked questions might help.
• Understanding the difference between good and bad debt will require you to be able to evaluate the key factors.
• An emergency fund is a key factor in your financial security.
• When used correctly, credit cards can be an easy and convenient way to make purchases while potentially earning rewards.

Student loans, medical loans and debt consolidation loans are all types of unsecured personal loans. You’ll want to consider your other financial goals, income, budget and your own personal habits when determining the best debt management approach for you. Start with this quick quiz to see what might meet your debt needs. Bad debt offers a temporary relief to your financial situation and doesn’t have a sufficient return on investment.

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Actual interest rates will vary by consumer and creditor. Debt.com’s writers are journalists, personal finance experts, and certified credit counselors. Their advice about money – how to make it, how to save it, and how to spend it – is based on, collectively, a century of personal finance experience.

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The Rule of Thumb: Clear Bad Debt Before You Invest

If the mortgage payments and related costs are more than you can afford, it could hamper your ability to build wealth. Debt management is the process of planning your debt liabilities and repayments. You can do this yourself, or use a third-party negotiator (usually called a credit counselor). This person or company works with your lenders to negotiate lower interest rates and combine all your debt payments into one monthly payment. This may be part of a debt management plan (DMP) established to repay your balances, if needed.

Both options can simplify your payments and lower the amount of interest you pay over time. Carefully review the terms and ensure these options fit your financial goals before proceeding. Managing debt effectively is essential for long-term financial stability.

Typically, bad debt doesn’t help you make progress toward your financial goals. The best example is high-interest credit card debt, especially if you can’t pay off your balance each month. By contrast to a first mortgage, a second or third mortgage is usually considered bad debt. This includes home equity loans and Home Equity Lines of Credit (HELOCs). You’re basically borrowing against the value of your existing property. You decrease your net worth good debt vs. bad debt because you increase your liabilities without gaining a new asset.

This allows you to access liquidity without the need to sell assets and therefore potentially incur capital gains taxes from the sale of the assets. Not all debt can be easily categorized as good or bad debt. Certain types of loans may have characteristics of both, making it really important that you understand the pros and cons of borrowing before you sign on the dotted line. Some experts recommend keeping your credit utilization rate below 30% to prevent it from adversely affecting your credit score.

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Homes tend to increase in value over time, building equity and contributing to your net worth. Student loans for education that improve your earning potential are another example. This kind of debt often comes with high interest rates and tough terms, which can place a strain on your finances.

They never give you anything of tangible value – they’re almost always used to cover emergencies when you’re short on cash. Credit cards have average APR that runs between 16-18%. You also pay finance charges that amount to about $30 for every $100 borrowed. The only time an auto loan is considered a good debt is if you purchase a car that can potentially increase in value. This is mostly limited to classic and collector cars.