Thursday, May 31, 2007

Good Debt vs. Bad Debt?

I've seen several articles about good debt vs. ugly debt. The folks at Take Charge America (www.takechargeamerica.org) sent me this piece about different types of credit. I'm interested in what other people think about debt. Here is the item:

"A record high of credit card debt is a sign that American consumers are living
well outside their means. As a nation, the Federal Reserve says we’ve amassed $800 billion in credit card debt, and that figure continues to climb.

Mike Sullivan, director of education for Take Charge America, a national non-profit credit counseling agency, says Americans have become consumed with “bad” debt.

“There is good debt and bad debt. Good debt ultimately leads to greater wealth, and bad debt can possibly lead to financial disaster,” he said. “Learning to decipher
between the two is vital to maintaining a healthy financial life.”

According to Sullivan, good debt includes items that you need, but can’t afford to purchase upfront – at least without wiping out cash reserves or liquidating investments. In cases where debt makes sense, consumers should only take loans for which they can afford monthly payments. On the other hand, bad debt, which usually comes in the form of high-interest credit card debt, accumulates when a consumer purchases items that they don’t need and can’t afford.

Good Debt:

Mortgage – A mortgage loan is an example of good debt. It generally has a low interest rate, and the value of the home will likely increase throughout the life of the loan, often substantially in the long run. You can also deduct the interest you pay on
the first $1 million of a mortgage home. Keep in mind, the more money you
are able to use as a down payment, the lower your interest rate will be.

Student Loans – A college education is pricey, but it significantly boosts
lifetime earnings. Therefore, student loans can help increase the
likelihood that you will make more money as you advance your career.
Student loans also carry low interest rates and some types do not need to be
paid until the student graduates or stops taking classes. In addition,
student loans can be a less-risky form of funding an education, compared to
borrowing against a 401(k) or obtaining a second mortgage.

Bad Debt:


High-Interest Credit Card – This is the worst kind of bad debt, and it
causes millions of people financial stress on a daily basis. According to
the credit card industry, the average American household that has at least one
credit card is carrying more than $9,000 worth of high-interest debt, which
doesn’t include mortgages. It’s very simple to combat this problem: live
within your means, discern wants from needs, and obtain the will power to say
“no” to unnecessary purchases. Further, if you pay off your credit card
balance each month, then you won’t have to pay any interest rates.

Auto Loans
(Bad Side) – An auto loan is bad when it is used to buy “too much” car.
Remember, as soon as you purchase a vehicle, its value decreases. So, just
because you qualify for a loan that enables you to purchase a luxury vehicle,
that doesn’t mean you should do so if you will struggle to meet monthly payments
and cause a financial pinch in other aspects of your life. Also consider
the cost of auto insurance, because generally the more expensive the car, the
more expensive the insurance.

Necessary Debt:

Auto Loans (Necessary Side) – Some bad debt can be necessary
debt. For instance, a vehicle is necessary for certain jobs, especially in
communities not set up for easily accessible public transportation. An
auto loan can provide you with a means to get to work. However, it is
vital that drivers use auto loans to purchase a car within their budgets.
Think about practicality and affordable monthly payments when vehicle
shopping. Make sure to evaluate the fuel efficiency and add in the cost of
gas to the overall cost of purchasing and operating a car.

Medical Bills – Medical problems are unfortunate life circumstances that often occur
unexpectedly. It can turn into bad debt, and it must be dealt with in
order to prevent serious financial strain. If you have medical bills that
are overwhelming, visit a credit counselor to discuss your options. To
locate a reputable credit counselor, visit the Better Business Bureau at www.bbb.org. "

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2 comments:

Anonymous said...

An auto loan can provide you with a means to get to work. However, it is
vital that drivers use auto loans to purchase a car within their budgets.
Think about practicality and affordable monthly payments when vehicle shopping.related information on
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roy said...

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