You may be under the impression that all debt is bad, and you could be forgiven for thinking so: why on earth would owing money in any form be a good thing? That just means you have to pay others every month rather than enjoying your own hard-earned cash.

You may be surprised, then, to learn that some debt is actually considered “good debt” and can boost your overall financial health. Of course, with any kind of debt, you never want to get in over your head so far where you can pay the debt off, but when making financial decisions, it’s good to know the difference. Here’s a quick guide to good and bad debt and how to avoid taking on debt that will hurt your financial health.

Good Debt

Good debt is considered to be any debt that you take on that represents a sensible investment into your financial future. In other words, if the debt you take on will make your life better once it’s paid off, then it’s considered good debt.

This includes things like student loans, mortgages and sensible purchases like an affordable car. Each of these will improve your life without breaking the bank (as long as you stay within your budget!) and can be made by borrowing cheap money. Good credit cards (like these at http://securedcredit.cards) can also benefit your financial health, as they will help improve your credit score if you pay them off in a timely fashion.

Whenever you’re wondering if a purchase represents good debt, just ask yourself if it will improve your overall financial situation in the future: homes increase in value and student loans represent an investment in your future and the ability to make more money.

Bad Debt

Bad debt, on the other hand, does nothing to help your future.

Bad debt includes things like luxury vacations that you borrow money for, cars and other major purchases that are out of your price range or that will strain you financially, and anytime you borrow money to pay bills.

Things like this will ultimately work against you, forcing you to pay for a vacation that you took three years ago or making a monthly repayment that takes away from other bills. If you borrow money to pay bills, you’re entering a vicious cycle that is difficult to get out of.

How to Avoid Bad Debt

Before you make a purchase, ask yourself if it will help you in the long run. If your answer is no, then it’s best if you avoid it.

Make sure that you are comfortable with any monthly payments. This will help you avoid having to borrow more money. Also, always shop around for the best deals you can find. Finally, make sure you understand any terms or conditions you agree to avoid paying more in the long run. If you must talk to your creditors about restructuring, do some research and aim to get a good deal.

Not all debt is bad. Just make sure to avoid anything that makes you financial situation worse and you’ll be fine.

Nicole Humphries worked in the personal finance sector and enjoys writing articles to help people get on top of their finances.

Categories: Debt