How To Recognize Good Debt Versus Bad Debt

Ideally, people want to lead their lives debt free. Owing people money is frustrating and makes you feel as if you are in bondage. When you are working just to pay someone else, you feel your work has less value and you are working to just turn over the money to other people. However, in most cases, it is impossible to live completely debt free. Some purchases are so large that you are unable to immediately pay cash and you need to borrow the money from a creditor. The good news is, there is good debt and bad debt and it is easy to tell the difference. Good debt is debt that shows you are living responsibly, paying your bills and living a responsible life. This debt is often secured, which means there is something you own that can back up the debt. Bad debt is usually unsecured which means if you stop paying your bills, there is little creditors can do to recover their losses. An example of good debt that is unsecured is student loans. A federal direct student loan helped you pay for your education and banks often overlook student loan debt when calculating how worth you are of a loan. As long as you pay your payments, it will be considered good debt.

Mortgage is another example of good debt. Owning a home is a big responsibility and if you have lived your life in a way that has enabled you to get a mortgage and maintain a home, you are proving yourself responsible to banks. The debt of your mortgage may be larger than any other debt you have, but the debt is secured. If you choose not to pay your mortgage, the bank can take your home from you. This offers the bank some security and when other creditors are considering lending to you, they will consider a mortgage a form of good debt.

If you are worried about bad debt, take a look at what you owe. If you have a lot of credit card debt and the ration of your income to this debt is out of balance, you are likely to be looked at unfavorably by creditors. Unsecured debt is that which you have used to purchase items in stores and online. Basically, you accrue unsecured debt by shopping and using credit cards to pay for items you would otherwise not be able to afford. Excessive credit card debt is considered bad debt and it will have a negative effect on your credit score.

Having excessive medical debt is a little like unsecured credit card debt. There is nothing a creditor can take from you if you have unpaid medical bills, so it is unsecure. This is a problem for families that do not have access to health insurance or who just let co-pays and their responsibility for their medical costs pile up without paying them. This debt, while accrued for reasonable causes, is still viewed by creditors as bad debt.

If you have neglected your credit card payments or medical bills, chances are good you have neglected your utility bills as well. If you approach a credit company asking to borrow money and they learn that you have not paid your water or energy bills, you will be turned down for lending. Unpaid utility bills will result in having your services turned off, but it will also damage your credit rating.

Source by Stewart Wrighter

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