Credit Card Debt, Debt Relief

Understanding the Difference Between Good and Bad Debt

Debt can oftentimes come with a negative connotation, but not all consumer debt is created equal. In fact, some types of debt are better than others. It is important for consumers to know the difference between the two types before taking on additional debt.

Good debt, for the most part, is debt that is used to help a consumer pay for goals or purchases that will enhance his or her overall wealth. Debt in this category includes mortgages and student loan debt, as well as small business loans. These types of debt tend to carry low interest rates and are tax deductible. Good debt is associated with a piece of property or collateral to guarantee the debt, although that is not always the case, such as with student loans.

Bad debt is money used towards the purchase of something that will not increase the consumer’s value. Many times, bad debt is used to purchase consumer products or goods, things that will not last long or at least the value in them will not last long. Bad debt includes purchases on credit cards to buy personal items or goods, as well as payments to finance a vacation or large appliance purchase. The term bad debt does not necessarily mean buying these items is inherently bad. It just means that they bring down a consumer’s credit score if not paid off quickly, and the interest rates associated with these types of debts are much higher.

Sometimes, it is not always clear whether a debt is good or bad. For example, when purchasing a car, the financing is often seen as good debt since it is a purchase for something the consumer needs to get from home to work. The same would go for medical debt. The consumer would not be incurring that expense but for a life-or-death type of need, but still, this debt is often seen as “bad.” Many times, these types of debt fall somewhere between the two categories. Depending on the consumer’s credit score, the interest rate could be very low, or it can be high, especially if a payment or two is missed. A car is usually collateral for a loan to purchase the car, so many consumers see this debt as good. However, as soon as the car leaves the lot, its value depreciates, which does not increase the consumer’s net worth. Medical debt is unsecured debt and is often the first to be discharged in a bankruptcy case, just like credit card debt, which can make many people believe this type of debt is bad debt.

With good or bad debt, the key is to pay the amount owed on time and to pay it off sooner rather than later. With good debt, such as a mortgage, since the interest rate is lower than what would be associated with a credit card, most financial experts recommend that consumers pay credit cards off first before focusing on the debt with lower interest rates.

Additionally, if a consumer is looking to make a large purchase and needs financing, the bad debt will drag that person’s credit score down much more than other types of debt, such as student loan debt or mortgage debt, as long as the person is on time with his or her payments. Ridding himself or herself of the bad debt will make the financing easier to receive and will also make the resulting interest rate offered much lower than it would be if the consumer had a large amount of bad debt on his or her credit report. It is for this reason that most financial experts and credit counseling agencies recommend the consumer put all his or her effort towards paying off those bad debts before focusing on any others.

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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.

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