What Type of Debt is Bad?

By: Cathy Howard


There are people who look at debt in two different ways. They feel that some debt is justifiable and they call that good debt. This is generally student loans and mortgages. Other debt they look at as negative, because it does not help your financial situation in the long run. This debt is called bad debt.
Bad debt is usually accrued when someone is putting their needs ahead of their wants. Instead of saving up to purchase a boat, they may take a loan out for it. Other people will simply use their credit cards to purchase things that are on sale right now, even if they do not have the money. Some bad debt is a result of poor money management skills and failure to properly budget your money.
An easy way to determine if a debt is a bad debt is to determine how it is affecting your financial situation. If it is not going to improve your financial picture in the long run, then it is most likely a bad debt and you should avoid taking out the loan. Cars may also fit into this category, though many feel that is a justifiable expense. It can easily become a bad type of debt if you buy new cars and you trade them in consecutively. This will hold you back from saving more money for retirement and other goals.
Many people will take a good debt (student loans and mortgages) and turn it into a bad one. This happens when you roll your excess spending habits into the debts that people consider good. A good example of this is a home equity line. Many people will consider this okay since it is tied to your home or is considered a second mortgage. However it prevents you from building equity in your home and so it affects your financial picture in a negative way.
If you feel that you have too much bad debt you can work to pay off your debt. Additionally you should stop borrowing money unnecessarily. If you do not have the money to pay cash for the item, you should simply not buy it. This will help you to begin to take control of your money and change your financial outlook.
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Cathy Howard is a Manila-based freelance writer who writes on a variety of topics.

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