Good and Bad Debt on Your Credit Report

For most of those who lived through the Depression,  a fear of personal debt is embedded in their minds.   Younger generations, have been more willing to accept debt as a normal part of everyday life. In light of the current economy, however, many consumers are now trying to figure out how to get by without running up unsustainable levels of debt.

The truth is, there's good debt, and there's bad debt. Bad debt can't always be avoided, and sometimes good debt goes bad.

What is "good debt"?

"good debt" could be considered as investments that grows as time goes on, such as a purchase of a home or school loan to get a degree. Student loans are considered good debt because they usually offer lower interest rates than other loans and because you're making a lifetime investment in your career potential.
Mortgage debt is even better debt, in the hopes that some day, your home investment will increase in value, and while you pay your mortgage, you are receiveing a tax deduction as well. As opposed to a rental, which is totally lost.

What is "bad debt"?

"bad debt" is debt for things that depreciate quickly and loose value over time, such as an auto or expensive designer clothing. You are paying interest on a long term payment for something that will be worthless by the time you are done paying it off.. (or at least pennies on the dollar)

To add insult to injury, if you pay off the minimim payment as in a credit card, with such high interest rates as 24 percent, the total cost of your depreciateing item will continue to increase, while its value continues to decrease. However, if you pay off your debt in full each month, where you end up paying no interest, then this is considered good debt, as you are taking advanting of protection that you get form using your credit card, as well as improve your credit score for being current on your payments (over time).  Again.. pay off your credit card payments every month, and avoid revolving credit.

Debt advice to live by

• Your total monthly personal debt shouldn't exceed 35 percent of your gross monthly income.
• Whatever item or service you finance should last longer than the life of the loan (such as a home or business and NOT a car or designer clothing). Fulfilling a lifelong dream to sunbathe in the Bahamas by charging it all on your credit card is an example of bad debt, since you'll be paying it off long after your trip is over.
• The loan should provide leverage that helps you build wealth such as a house.. and as stated earlier, mortgages offer tax deductions, so you can get back approximately 1/3 of your mortgage and taxes paid!!

Debt questions and answers

Question: If I always pay cash and never incur debt, wouldn't that be a good thing if I later need to apply for credit?

Answer:  Well, not really, because by paying cash for everything, there is no record of responsibility that you can pay back your loans in a timely fashion.  So its good to have some debt, and pay it off promptly.

Question: But if I've avoided taking out loans altogether, doesn't that show that I'm careful with my money?

Answer: Not really. Lenders want to see that you can both obtain credit and repay it responsibly. Specifically, lenders will likely focus on your debt-to-income ratio, which tells them how much available credit you have and the portion you've spent.

So, simply remember to take out debt as you need it. It can be a good thing if you follow a few simple rules, and have some discipline.