Many financial experts often talk about good and bad debt. This is confusing for some as it’s normally considered that debt is always bad. Surely there’s no positive side to parting ways with your money and being in debt to someone?
So, is good debt really a thing?
You might not believe this, but yes, it is. There is more than one type of debt out there, and good debt is different to bad debt. The best way to illustrate this is to look at examples of good debt to show why it’s more of a positive type of debt to bad debt.
I think the best way to explain good debt is to say that it’s any debt that will benefit you in the future. There are many things we can spend money on that put us in debt in the present but will reward us down the line.
Student debt is a prime example of this. It may not seem like good debt at the time, but you will reap the rewards of a college education in your future. It can pave the way for a successful career where you earn lots of money. Just look at this article on usatoday.com as evidence of this point. The wage gap between college graduates and people without college degrees is larger than ever before. As such, you can argue it’s worth being in debt as you do benefit from the education.
Another example of good debt is a debt consolidation loan. This is a loan that helps you get rid of all your other debts. It says on debtconsolidation.loans that you can often obtain one of these loans at a better interest rate than your current debt. So, although you are in debt, you benefit because you get rid of multiple debts and can now pay everything at a lower interest rate, in a much easier fashion.
Bad debt is pretty much what you think about whenever someone mentions they’re in debt. It’s the type of debt that puts you in a bad financial situation, and you get no benefits from the debt in the future at all. Bad debt is incredibly hard to pay off and can usually be avoided in the first place.
The most prominent example of bad debt is credit card debt. In reality, a credit card isn’t essential – you don’t need one. So, when you get one and end up in debt, it’s a situation you don’t need to be in. What’s more, you get nothing out of being in debt other than losing a lot of money. Interest rates can get bigger, and the debt can rack up higher and higher.
You see, good debt is a genuine thing. There are cases where being in debt isn’t the end of the world, and you will actually profit from it in the years to come. Bad debt is what you want to avoid at all costs. We wrote an article here quotegoat.com/finance/debt-is-now-an-emergency-changing-times-in-the-uk/ that spoke about debt in more detail. Check it out if you want some extra reading after this.