Incurring debt is somehow a necessity of life in North America. Although necessary, we should not allow it to control us … but how? Although dreaded, we can navigate through it if we know which ones are of benefit.
Good debt – good debt enables us to achieve life’s goals in a financially sound way. It usually is taken as an investment for the future as well as an efficient way to meet our needs. An example of this is a mortgage. It is a loan which when invested in a real estate property will more often than not will increase in value as time goes on. At the same time, it provides a place to live and raise a family.
A student debt, kept at a manageable level, is also considered a ‘good debt’ since it provides training and education which increases your chances of a better paying income source in the future.
Bad Debt – money owed to buy non-essential items are generally bad with a capital B! These usually takes the form of small, impulsive purchases charged to a consumer credit card which builds up if not monitored closely. A vehicle loan may sometimes be ‘bad’ because of interest rates and depreciation. In terms of improving your financial situation, eliminating bad debt should be first priority.
The Ugly – money spent on interest, especially on credit cards, is money spent on nothing. Consumer credit cards, especially store cards charge a hefty interest rate some as high as 28%! Credit cards like Visa, Mastercard and the like, also charge 18% as a standard. When compared to how low interest rates on mortgages are or how miniscule banks give to savings account, credit card rates are comparatively outrageous.
Interest rates are based on whether a loan is secured or unsecured. Mortgages for example are secured against your home. Credit cards in comparison are unsecured and depends only on your promise to repay. This determines the risk the debtor takes and is reflected on the interest they charge.
Having too much debt? Many believe that as long as they pay their minimum monthly payments they’re OK. Generally, not more than 15% of income shoud be used to pay for debts. It should be everyone’s ideal to get out of debt and be debt free as soon as possible. This all points to a need to manage money instead of money controlling you.