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Loans, Credit and Investing: Walking the Line Between Good Debt and Bad Debt

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Very few people manage to get through life without accruing some debts along the way, even if it is for a short period of time and most of us are consistently paying down debts on a regular basis.

Sometimes it can take just one wrong turn or an unfortunate incident like a redundancy, to turn what was manageable debt into a worrying scenario where you are unable to repay everything you owe each month.

To be able to deal with debt and manage your finances in a controlled way, it makes sense to understand the difference between good debt and bad debt and then have a plan for negotiating some choppy financial waters when you find yourself sailing in them.

Part of life

Debt is an everyday part of life and quite simply, it is the word used to explain the process of borrowing from someone else and agreeing to repay the money owed over a specific period of time.

All debt is fundamentally the same, it is money we take for now and then give back some time later but debt also has the capacity to create positive or negative consequences, which is why there is good debt and bad debt.

Good debt explained

Good debt can help you to increase your net worth and also generate value. It also helps you to leverage your level of wealth and gives you the ability to handle most unforeseen emergencies when they occur.

A prime example of what is considered good debt would be a mortgage, as borrowing money to buy a house gives you the chance to benefit from an increase in the value of your home or create a rental income.

Bad debt

Any debt that does not have the ability to increase your wealth and is used to purchase any goods or service with no residual value, is considered to be bad debt.

One of the most common forms of bad debt that can be used as a good example, is keeping a balance on a high-interest credit card but only paying the minimum balance each month.

Know where you stand

Now that you know the basic difference between good and bad debt, your next step is to get a clear picture of what your current financial situation is so that you can formulate a plan to clear any debt owing.

Being in debt can definitely have quite an impact on your financial future and having bad debts will potentially blight you and ruin your credit report for years, unless you do something about it, such as talking to a consumer law attorney if you believe there has been some kind of error.

Your first step is to get a copy of your credit report and see what lenders are saying about you and how good or bad your credit score is.

Debt consolidation

One of the classic problems that many people suffer from, is having too many individual debts that have built up over a period of time, making your monthly payments barely affordable when you add them all together.

If you have a number of loans and credit cards that your juggling your finances with, it can make a lot of sense to use someone like Debt Consolidation USA to borrow a sum that allows you to pay off your existing debts and replace it with one monthly payment instead.

This can often work out cheaper than repaying all the individual loans, so it gives you more money each month, but you should not then start to accrue more loans and build up card balances once you have already consolidated.

DIY debt reduction plan

Another method for tackling your debt is to create your DIY reduction plan. There are two methods involved with this strategy, which is the avalanche or snowball method.

What this means is that with the avalanche approach, you pay of the debt with the highest interest rate first and with the snowball approach, you pay off the account with the smallest balance first.

This targeted approach to clearing your debts in a certain order can work effectively provided you are disciplined and continue paying the same amount each month, by paying larger amounts off your remaining debts each time you clear one of your balances.

Getting help

If you are struggling to get a plan together or simply need some help and advice with your debts, you could try approaching a credit counseling organization, who can help you draw up a budget and a plan, sometimes for free.

Plan ahead

You may already have debts that you are trying to deal with but with a bit of advanced planning, you may be able to avoid accruing any more balances in the future.

If you can set aside a sum of money each month into an emergency savings account each month, the next time the car breaks down or you get a home repair bill, you may have enough money to pay for the financial emergency out of savings, rather than put it on a credit card or take out a loan.

Many of us can find ourselves walking the line between good and bad credit at certain times, so take action to ensure that you stay in control as best you can.

Lizzy Bale is a happily married mother of three who enjoys life one day at a time. She loves the outdoors. She also loves hiking and swimming the most. When she does have to stay indoors, she likes to contribute her experiences with personal finances, paying down debt and managing the household budget.