Good Debt Versus Bad Debt

Once you borrow a certain sum of money you acquire a debt. Generally speaking, debt can be classified as either a good debt or a bad debt. It’s really important to understand the difference between both because knowing the difference could save your financial life. In short, good debts generally increase your earnings. While bad debts decrease your earnings.

As soon as you borrow money from a financial institution you have acquired debt. Many people hear the word debt and begin to think of all the negative stories and troubles it brings. Debt however is not always bad. Like two sides to every story, there is a Good Debt and there is a Bad Debt. Depending on your budgeting and spending habits, your financial decisions will directly determine which type of debt you fall into. Briefly speaking, Good debts will generally save you money while bad debt will continue to create larger debts.

Majority of people will need to take out a loan at one point in their lives, depending on their credit history the amount of interest they pay on that loan will direct fluctuate with their credit score. By making payments on time to your lenders you will begin to build good credit. This type of financial discipline will fall under Good Debt.

If for some reason, you do not have the means and funds to pay your lenders back in a timely fashion, this will begin to lower your credit score which will directly affect the interest rate of your loan. Thus making your monthly payments larger and even harder to pay off.

Good Debt and Bad Debt co-exist. Depending on your financial habits your debt will fall into either category. Here are some advantages of having a good debt and some disadvantages of having a bad debt.

Advantages of Good Debt:

• Lower interest rates for large purchases ( Cars, Homes, Education )
  

• Increase in personal Cash Flow
  

• May notice signs of more annual earnings.

• Financial stability as well as financial security.
  

Disadvantages of Bad Debt:

• Oftentimes creates larger debts which become harder to payoff in full.
  

• Larger monthly payments mean less cash flow for other expenditures
  

• Less cash flow may prevent you from diversifying your cash flow.
  

• Financial instability as well as financial insecurity.