Is there a difference between good and bad debt?
One of the most important consideration when buying on credit or taking out a loan is whether the debt incurred is good debt or bad debt.
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. Mortgages, and some auto loans, could also be considered good debt.
Bad debt is debt incurred to purchase things that quickly lose their value and do not generate long-term income. Bad debt is also debt that carries a high interest rate, like credit card debt. The general rule to avoid bad debt is: If you can't afford it and you don't need it, don't buy it. In addition to credit card debt, payday loans or cash advance loans are some of the worst kinds of debt you can take on.