Are you struggling with debt? Wondering whether all debt is bad for you? If it is, then why is a credit score so important, and how do you get to a good one without drowning?
This article will review the good parts of incurring debt and try to help you avoid the bad!
Debt: The Good, The Bad, and the Ugly
Poorly regulated debt was a significant factor in the 2008 Housing Crisis and recession. Companies took advantage of people looking for mortgages and lent to people that couldn't pay them back. The financial sector failed, and many companies exploited the lack of regulation. The resulting economic downturn had far-reaching effects in the United States and globally. The long-term effects continue to ripple even today; many families lost lifelong savings and financial stability. High levels of unemployment and underemployment continue to affect people, especially millennials and Gen Z.
Most people have a visceral, adverse reaction when thinking about debt due to its association with stress and strain.
According to Urban.org, the following statistics apply to debt in America:
While these statistics are symptoms of a significant problem of income instability, it's worth noting that some debt is necessary, such as taking out a mortgage to purchase a home or a car loan to finance a reliable vehicle. However, it's essential to carefully consider your financial situation and ability to repay the debt before taking on any new loans or credit card debt.
"Good debt" may sound like an oxymoron, but it's not. It refers to debt that improves your life circumstances and financial standing. Good debt is controlled debt. It's any debt you carry from a reliable institution that you are confident you can repay. Good debt builds your credit score and allows you to purchase things that improve your life.
Many people start their debt with a student loan; this can fall under good or bad debt. To ensure your loan is "good," study something that you know is an industry that will be around for a long time, and you produce something people need. Whether that's innovating machines, providing new insights into life, history, the brain, organisms, providing solutions to people's problems, or creating entertainment, media, and art. With AI steadily replacing many jobs people do, it's critical to consider where your career will be in the future.
Two other common sources of debt are cars and homes. Both of these are vital to living. If you live in a city with reliable transportation, you don't necessarily need a car, but many people can't afford to live in safe areas with good transit. Instead, some opt to save money and decide to live in areas where they need cars to get around. Choosing to live in an area that requires a vehicle also means the necessity for car maintenance. Newer cars are more expensive upfront but require less maintenance down the road. Someone's financial situation determines how much they can afford. Homes are no different; buying and paying for a mortgage mostly means a lower monthly payment, but people need to save up on the down payment. Even an FHA loan, which only requires a 3.5% down payment, still means someone has to save up to $14,000 for the average $400,000 home price. Renting is also an option, but most people think you can't build credit via renting. They're incorrect. Sign up for a rental reporting service and start improving your credit today.
Credit cards, when well managed, can be also considered good debt. To maintain your debt, stick with a single card and pay it off monthly. If your balance gets out of control, try paying off a little from each check rather than a lump sum at the end of the month. You can use the same method to pay other sources of debt like student loans and mortgages. Good debt is a debt you can afford with your monthly salary that helps build your credit.
Bad debt refers to debt you cannot pay back, which can cause your credit score to plummet and lead to additional fees. When you cannot repay your debts, you can quickly find yourself in a difficult financial situation. You may struggle to make ends meet and even be forced to make difficult decisions about which bills to pay and which to ignore. It is essential to stay on top of your debt and make timely payments to avoid bad debt and the negative consequences that come with it.
Another form of bad debt is loans from private entities. When you do a person-to-person loan, you don't get the benefits of credit building. You also become indebted to another person rather than a company with regulations and structure. Avoid loans like this, whether for personal or business reasons. They quickly become messy.
Debt is common in modern life, but not all debt is created equal. While some types of debt, like taking out a mortgage to purchase a home or a car loan to finance a reliable vehicle, can be necessary for life stability, debt can lead to negative consequences if not managed properly. It's important to carefully consider your financial situation and ability to repay the debt before taking on any new loans or credit cards. The key to avoiding bad debt is to make a budget and create a plan for paying off debts promptly; this can include making payments off of each paycheck rather than waiting until the end of the month and avoiding excessive spending on credit cards.
Overall, understanding the difference between good and bad debt can help you make informed financial decisions and avoid negative consequences in the long run. Diane Money can help you manage your finances.
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