Make no mistake: No one wants to be in debt. It means extra fees, added considerations to your budget, and maybe a few headaches. Unfortunately, it’s a common occurrence.
A piece by ABC News states that Australia has the second-largest number of household debts in the world, making it a widespread problem. And around 37% of Australians are struggling to pay off their debts.
But sometimes, it isn’t a bad idea to take out a loan or use your credit card. Debt can be good or bad, and that depends on multiple factors such as financial status, your reason for borrowing money, and more.
So, how can you tell the difference between good debt and bad debt? Keep reading to find out.
Good debts are made for investments. They help you generate income or increase your net worth.
Student loans and mortgages are examples of good debt. This is because university graduates have a better chance of landing a job with better pay, while homes are financial assets that grow in value over time.
Good debt also comes in the form of business loans, which you can use to jumpstart your company and start making sales. But remember that these debts also need to be paid back on time. Otherwise, it can quickly become bad debt that is no longer an asset.
Another reason why debt can be good is that it increases your credit score. Your credit score is a bit like your reputation in the realm of money lending. And the best way to improve it is to diversify your debt, as pointed out in a guide to building credit by Petal.
Your credit mix — or the kinds of credit you use — is one key factor in your credit score, so it’s good to have a little of each. You can have revolving credit, such as credit cards or bank lines, as well as instalment credit, like student loans or mortgages.
Another option is to take out an auto instalment loan, which is one of the easiest to obtain. Just be sure to apply for one with reasonable interest rates. So long as you pay back your debts on time, your credit score should be good.
We’ve established that debt isn’t a necessarily a bad thing.
Still, there are many types of debt to watch out for, especially now.
Taylor Kee’s list of signs of a global crisis mentions debt as one factor. As it stands, the current amount of global debt is three times the entire world’s GDP. That means people all around the world are struggling with debt, be it in the government, the corporate sector, or in households.
Now, whether debt can be considered ‘bad’ greatly depends on your current financial status. But as a general rule, refrain from borrowing money for assets that depreciate in value or do not generate income. Things like cars, luxury holidays, and consumables aren’t worth incurring debt for. The same goes for clothes and other products, especially for the festive season.
The New Daily’s article warns people against overspending on holidays. It’s recommended that you plot out a budget before going gift shopping. Otherwise, you’ll be prone to overspending and taking on more debt than you can handle.
These were the definitions of good and bad debt, as well as a few examples. Make sure to keep these in mind when making important financial decisions. And always remember to consider your financial status.
Debts are a time-sensitive commitment, and your investments won’t matter if you neglect to pay them.
Howard P. Livingston
(Disclaimer: this material is provided for example purposes only. It should not be construed as investment advice. The opinions expressed are the personal views and experience of the author, and no recommendation is made.)