What is an Example of Bad Debt?

Bad Debt in America

Millions of people today struggle with all different types of debt. According to a Federal Reserve Report on the Economic Well-Being of U.S. Households, published in May 2017, 79% of Americans have at least one credit card. This means that millions of Americans are faced with credit card debt and have to manage their finances accordingly. Debt can be very stressful and overwhelming, especially as your balance continues to grow.

As you think about your financial well being, it can be very confusing when you constantly hear terms such as good debt and bad debt. You may even be wondering what these terms mean and how debt can be bad or good.

What is Bad Debt?

This type of debt is incurred from purchasing assets that depreciate or go down in value as soon as you buy it, such as clothing and consumable goods. If you are unable to make money or generate income for a purchase, it may not be worth going into debt over. Purchasing a new car is another form of this kind of debt because, as soon as you purchase a new car and take it home, it has already gone down in value.

Another typical example is credit card debt. Credit cards are designed to make sure that you pay the maximum possible with high-interest rates. They can also have an extremely negative impact on your finances if not appropriately managed. If you keep a balance on a credit card, it will end up costing you significantly more than what any item or service you buy is worth. This is especially true if you only make the minimum payment every month. Credit cards are seen as one of the worst examples, but there are others.

What is Good Debt?

Good debt is seen as “good” because, ultimately, it is used to help you generate income or increase your net worth. Short term investing and real estate investment loans are just two examples. The most well-known example today, however, is student loan debt. As the costs associated with higher education continue to rise, it is becoming increasingly more difficult to pay for college.

Taking out student loans to fund your education can be good because the loan will eventually pay for itself once you finish school and can find a job. Individuals who have a college education consistently out-earn those who do not have a college degree, so this can be seen as an investment in your future.

Another example of good debt is taking out a small business loan to help grow your business. Creating your business is a great way to generate income and potentially increase your network as well, similar to small business loans are loans for short-term investments.

Managing Your Debt

To stay on top of your debt, it is important to actively manage your debt and work towards eventually becoming debt free. Having a mix of good and bad debt is normal, but it is important to limit or pay down the latter quickly to stay on track with your financial goals.

If you need help with your bad debt and regaining control of your finances, it may be worth it to meet with a certified debt specialist to come up with a comprehensive debt relief plan. Meet with ours at Liberty Debt Relief, and explore multiple debt relief options and ways to get back on track to financial freedom.