What is the difference between good and bad debt?

Credit is designed to help people. It can provide funds to cover essential costs. With wise management and regular payments, it’s easy to pay off its incurred debt. It’s simple: you just need to spend sensibly.

As well as being helpful to make essential purchases, some debt types can also boost your credit record, too.

So, what’s the difference between good and bad debt?

Here we explain.

Good debt

Good debt is an investment that will be financially beneficial in the future and that has been chosen for a specific and logical reason. Examples include a mortgage or investing in a business.

Essentially, anyone can invest in good debt – they just need to know how. To begin, look for the most affordable credit method. After this, identify the amount to be borrowed, interest rates, charges, and terms. That way, you can work out an overall cost projection – and how you will repay the debt.

Good debts could also reflect well on your credit score.

Bad debt

You may already know about ‘bad debt’. Put simply, it can cause financial burden for its holders.

Bad debt implies poor planning and impulsive spending in relation to credit.

Through poor organisation, borrowers can lose track of what they buy on credit. As a result, they may not be able to pay debt back in full.

People that can’t afford to repay credit in the first place often fall into bad debt. Those with good debt, in contrast, are usually able to make prompt repayments.

Organise your finances, and you can steer clear of bad debt – and any potential harm to your credit record.

Debt management

Financial management is crucial – especially when it comes to debt.  Stay on top of your finances, and you’ll be able to avoid bad debt at all times.

And luckily, it’s easy to achieve. That’s because it’s rooted in common sense. Credit exists for people who need it – as opposed to those who simply want it.

In other words, it’s for groups and individuals that have no other means of meeting critical costs, like food and energy bills. It can be useful if your salary arrives after bill due dates, for example.

In this case, most borrowers clear their debt once they’ve been paid. Of course, it should only be considered if there is no other way to meet vital payments.

Responsible credit users stand to reap big rewards for their credit score.

Debt doesn’t have to be a dirty word. If managed sensibly, it can be a positive thing. Once you know how, it’s easy to develop good debt.

There are lots of ways to make the most of your money. Careful budgeting, saving and monthly evaluations are just three options. How will you maximise your assets?