Good Debt vs. Bad Debt

Not all debt is created equal.  Having some debt is actually necessary for building credit.  Why credit is important will be covered another day.

Bad debt includes:

  • credit card debt
  • car debt (this one’s a bit controversial because it depends on a lot of other factors)

Good debt includes:

  • mortgage (with a 20% down payment or more)
  • student loans

A lot of people don’t realize how counterproductive it is to aggressively pay off their student loans then turn around and finance a new car they can’t really afford.  That’s trading good debt for bad debt.

As a general rule, don’t be in such a rush to pay off your good debt.  But make sure you DO pay the balance on time each month!  This is very important because if you don’t, it will hurt your credit score A LOT.  And try to pay off your bad debt ASAP, starting with the one with the highest interest rate (APR).

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6 thoughts on “Good Debt vs. Bad Debt

    • Good question! HowStuffWorks sums it up really well:

      “Good debt is an investment that will grow in value or generate long-term income. Taking out student loans to pay for a college education is the perfect example of good debt. First of all, student loans typically have a very low interest rate compared to other types of debt. Secondly, a college education increases your value as an employee and raises your potential future income.”

      Here is the full article:

      http://money.howstuffworks.com/personal-finance/debt-management/debt1.htm

  1. So I have a question – I’ll have to restart paying my loans June 2014 since I end school this month. Should I work on repaying those loans prior to June or should I just pay the minimum once June rolls around? (Keep in mind that *fingers crossed*, if I get into grad school, I’d be accruing more debt come September 2014). Thanks Annie!

    • Thank you for your question Jess!! I love questions :).

      Yes, WHEN you get into grad school, you will be accruing more debt. But you also won’t need to start paying that debt for another 2+ years, right? So you’d still get a few years to focus on paying down your current loans before they overlap. Ultimately, it comes down to what your goals are in the next few years.

      If you plan on buying a house, buying a car, getting married, having babies or doing anything that requires a lot of cash in the next few years, it might be better use your extra money towards building up your savings account. If you do decide to use your extra money towards paying down your student loans at a faster rate (whether it’s paying before June 2014 or paying above the minimum), make sure you first have an emergency fund that will cover at least 3 months (ideally 6 months) of your expenses just in case.

      Hope this helps! ❤

  2. Pingback: Interest Rate | Millennial Finance

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