Watching Your Wallet: Good debt vs. bad debt
Owing money may not seem like a financial advantage, but experts say it’s all about the type of debt you’re carrying… In this Watching Your Wallet, Consumer Investigator Rachel DePompa breaks down the difference between good and bad debt, and why you might want a little bit of both.
Good debt is debt with the potential to increase your net worth. It’s having assets that don’t lose value, take your mortgage on a home. Over time that house will likely increase in value. That’s considered good debt. Michael Joyce with the financial firm Agili says bad debt is when something loses value quickly. “Bad debt would be taking out credit card debt to subsidize your ongoing monthly expenses or even buying any kind of depreciating asset like a car or a boat.”
If you do need to buy a big-ticket item like a car, Joyce says it’s best to have as much money as possible to put down, so you make your loan payment manageable and you don’t have to take out the loan for a long time.
Basically, you don’t want to be a in a situation where your car depreciates faster than the term of your loan. Bad debt is still important to have. We now live in a credit card over cash society, but if you do have credit cards it’s important to pay them off, in full each month, or have a plan to pay that debt off as quickly as possible.
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