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What’s the difference between good and bad debt?

What’s the difference between good and bad debt?

There is such a thing as good debt. The trick is learning the difference between which debt will cause you problems and which debt will help you. It is important to understand because you should not be afraid to take on any debt at all. You just have to learn to take on good debt instead of bad debt.

NerdWallet explains that good debt will give you a financial boost while bad debt will likely result in financial trouble.

Good debt examples

Good debt is something that will enable you to increase your financial situation, such as buying a house. This type of debt usually has a low interest rate and allows you to gain something more than just the initial purchase.

Using a home as an example, not only do you get the property but also the equity in it. So, a mortgage will pay you in the end, which is why it is good debt.

You should note that good debt can become bad debt if you are not careful to avoid going so far as to create a negative financial situation. For example, student loans are often good, but they can become bad if you do not secure employment quickly and establish a repayment that is affordable.

Bad debt examples

Bad debt costs you more than you get. Credit cards are the prime example because you only get the item you purchase, and by charging it, you end up paying more than it is worth. Often bad debt has high interest rates and will snowball because it is difficult to pay them off.