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What is the difference between good debt and bad debt?

On Behalf of | Apr 24, 2015 | Debt Management |

It’s certainly easy to rack up debt these days with the prevalence of credit cards and other lending companies that are willing to borrow you money so long as you pay it back with interest.

With that said, not all debt is considered bad. For example, it is better to have some debt in order to keep cash reserves on hand in case of an emergency. It is also possible to make your money “work harder for you” by taking on debt, in some situations.

However, not all debt is created equal. In other words, there are certain types of debt that make financial sense for your situation and other types of debt that only make your financial situation worse.

As CNN Money explains, good debt is debt that you take on to pay for things that you need but cannot pay for without wiping out your cash reserves or investment accounts. It is debt for which you can afford the monthly payments, and it comes with a reasonably interest rate.

An example of a “good” debt may be a home mortgage, so long as you can afford the monthly payments.

Bad debt, on the other hand, is money that you borrow for things that you don’t need and cannot afford. This type of debt is usually put on credit cards, and it usually comes with high interest rates. An example of bad debt is putting a vacation you cannot afford on a credit card.

Additionally, financial experts say that it is typically best if your long term debt payments such as your mortgage, credit card payments and car payment do not exceed 36 percent of your gross monthly income.

If you have too much of the bad kind of debt, you may want to consider a debt negotiation service to potentially lower the amount of bad debt that you owe. However, you will only want to work with a qualified service, such as a bankruptcy law firm, in doing this.

Keep reading to find out more about the debt negotiation service offered by our Milwaukee bankruptcy law firm.


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