Good Debt Vs. Bad Debt: What's the Difference?
If you’re one of the roughly 300 million Americans living in debt, the idea of categorizing it into “good” and “bad” may seem a little crazy. After all, doesn’t any amount of money you owe seem bad? For most of us, it might be fair to say that the only good debt would be no debt at all.
The flipside is the fact that there are roughly 300 million Americans living in debt means that not all debt is bad. Some is just a part of life—and that type of debt is classified as good debt. Knowing the different types of debt and how they affect your credit can help you make a plan for your debt and financial wellness.
This is the most popular type of debt, and the type that affects a credit report the most. Credit cards and personal lines of credit fall into this category.
Bad debt is commonly known as “unsecured debt.” Unlike secured debt, which is tied to an asset, unsecured debt is a major risk to the lender. If a borrower fails to repay the balance, for all intents and purposes, that money is gone and the lender is out the funds.
As a result of the “unsecured,” borrowing generally comes with a higher interest rate and a threshold for “safe” debt—don’t spend more than 30% of your available credit limit.
Also known as “secured debt,” good debt can generally be described as a positive investment for your future. Debt that falls under this category would be borrowing towards expenses like mortgages and auto loans.
This type of debt has a lower impact on your credit report, because it is considered marginally less threatening to lenders. When you borrow for a home or a car, there is an asset that can be repossessed if the borrower fails to pay it back.
Once you determine which kind of debt you have, making a plan to get out of debt gets a little easier. If you’re faced with both types, attacking the bad debt first will enhance your credit report faster. Whenever you’re making a serious plan for your finances, it’s always a good idea to call in a professional to make sure you’re taking everything important into consideration.
Kat’s Money Corner is posted in the Kansas City Star every week. Kat Hnatyshyn, when not blogging or caring for her little ones, is a manager with CommunityAmerica Credit Union. For more financial chatter, follow us on Twitter @CommunityAmerCU.