What Is The Difference Between Good Debt And Bad Debt?

Focus on Good Debt Strategies

Is there such a thing as good debt? Yes there is, especially when compared to bad debt. Understanding and examining your finances and eliminating financial mistakes along the way, in regards to debt is very important, especially if you are in a position where eliminating debt has become a priority.

Debt that you incur that increases in value is considered good debt. For example, if you buy a house, more than likely it will increase in price, whereas renting a place, can't be considered an investment for you. When considering which of your debts is "most important", it is debts such as home mortgages "that are secured" by the home itself. Meaning, this is a priority debt, that could cost you in late payment fees or interest or the loss of your home altogether.

Homes, real estate, rental property, commercial real estate and even an education are all considered examples of good debt. The reason being, is they potentially go up in value or in the case of a better education are considered more valuable. These types of debts should receive your priority as well, when considering "who do you pay first" because you could lose in fees or interest or the entire investment.

Eliminate Bad Debt Strategies

Let's take a look at what is considered, bad debt. Very simply, bad debts are things that you buy or get indebted to, that don't go up in value. A good example of bad debt would be buying a new car over a used one. As we all know, once you buy a new car it immediately decreases in value, not to mention higher insurance as opposed to a used car. A new car will also be secured debt, which could mean if you default on the loan they will come get your car. You will lose the money that you have in it and it would be a detriment to your credit. On the other hand a used car could possibly be purchased with cash and with lower insurance costs. Its conceivable that you could get a large percentage of your money back if you choose to sell it later.


Change your Financial Strategies

There are some things we have to have like a car, a place to live, food and utilities. Finding strategies that optimize the use of your income in regards to debt can be very beneficial in the long run and possibly avoid a financial crisis.

Changing our financial strategies, for the better, is like changing any habit. Slow and difficult at first. But with a little effort and imagination we can change a little bit over time, which hopefully will increase our results, for the better, later down the road. Its all about the mindset and effort.

For instance, instead of buying that new 500 $ flat screen tv, perhaps consider buying an original work of art or a letter or drawing by someone famous. Or perhaps you could use that same money for starting a gold coin collection. Turn those items you purchase or buy with loans or credit into items that increase in value as opposed to decreasing in value. Over a lifetime, this simple change in financial and debt strategy is sure to pay off in the long run!