What are Good Debts & Bad Debts

The amount of debt in most countries, no matter where you look in the world, is increasing.

People are increasingly getting into debt and this is a worrying sign for most governments. One of the reasons for this is that credit is much easier to obtain than ever before. Banks are sending out credit card approvals through the mail and are working hard to encourage people to use credit cards for their purchases and unfortunately get them into debt.

Only a few years ago credit card issuers (such as banks) used to look for customers who were of a reasonable financial standing and would only issue credit cards to those who could repay and who had a good credit rating.

There is such a thing as good debt and bad debt. The good debt and bad debt principle is something people need to learn.

Basically, it’s okay to take on a debt if it is for a good purpose and produces a good return. Many people borrow money to invest in business opportunities and they sometimes end up making a profit on their investment after repaying the loan.

In general, debt is something you should stay away from. If used correctly, debt can assist you in growing your wealth, so you need to be educated and smart about how to use debt, if you use it at all. Some debt, unfortunately, is forced on people even though it is so-called good debt.

Good Debt

Good debt produces profit or a return. Bad debt does not.

If you use debt to purchase an asset such as a property and the property produces income by way of revenue, plus a gain through increased property value in the future, then it is termed a good debt.

Bad Debt

The concept of bad debt is exactly the opposite. If you go into debt and use the money to purchase items that don’t contribute to creating wealth, then it is a bad debt. The purchase of any items that are disposable or not durable, or that lose value, or that are dissipated through entertainment, is known as a bad debt.

Credit cards are possibly the biggest contributor to the bad debt principle. People use their credit cards to pay for all sorts of things and most does not contribute to growing wealth. To make matters worse, the interest charged on credit cards is the highest of almost all types of debts.

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