Not all debt is bad. Understanding the difference is key
If you’re one of the roughly 300 million Americans living in debt, the idea of categorizing it into “good” and “bad” may seem a little counter-intuitive. After all, doesn’t any amount of money you owe seem bad? For most of us, it might be fair to say that the only “good” debt would be no debt at all.
The flip side is that there are roughly 300 million Americans living in debt, and it can’t all be “bad.” Some is just a part of life — and that type of debt is classified as good debt. Knowing the different types of debt and how they affect your credit can help you make a plan for your debt and financial wellness.
Bad debt
This is the most popular type of debt: the type that affects a credit report the most. Credit cards and personal lines of credit fall into this category.
Bad debt is commonly known as “unsecured debt.” Unlike secured debt, which is tied to an asset, unsecured debt is a major risk to the lender. If a borrower fails to repay the balance, for all intents and purposes, that money is gone and the lender is out the funds.
As a result, borrowing generally comes with a higher interest rate and a threshold for “safe” debt — don’t spend more than 30% of your available credit limit.
Good Debt
Also known as “secured debt,” good debt can generally be described as a positive investment for your future. Debt that falls under this category would be borrowing toward expenses like mortgages or a vehicle.
This type of debt has a lower impact on your credit report because it’s considered marginally less threatening to lenders. When you borrow for a home or a car, there is an asset that can be repossessed if the borrower fails to pay it back.
Once you determine which kind of debt you have, making a plan to get rid of it now gets a little easier. If you’re faced with both types, attacking the bad debt first will enhance your credit report faster. If you’re making a serious plan for your finances, it’s always a good idea to call on a professional to make sure you’re taking everything important into consideration.
Kat’s Money Corner is posted on Dollars & Sense every Tuesday. Kat Hnatyshyn, when not blogging or caring for her little ones, is a manager with CommunityAmerica Credit Union. For more financial chatter, visit http://communityamerica.com.
This story was originally published September 27, 2019 at 12:00 AM.