What is Good Debt

Debt tends to have a bad rep. We think of debt as something that has to be got rid of at all costs. And while debt management is necessary in terms of bad debt, it is important to know how to properly use good debt to get ahead in terms of finance. It may seem strange to think of debt as good, but there is such a thing. Basically, good debt is debt that helps you accomplish something financially, whether it be a better credit rating or making money through an investment.

Good debt: boosting your FICO score

Good debt can help you boost your FICO score, or credit rating. When you are debt savvy, you avoid getting in over your head. You use credit cards sparingly and then pay them off each month. Credit cards only become bad debt when you let them pile on the balances, racking up interest charges and spending more than you borrowed in the first place. When you use debt carefully, though, it can work to your advantage. Using a credit card for occasional purchases that you pay off quickly actually helps you build a credit history that shows you as responsible. Your FICO score improves if you keep credit card balances low and make payments on time.

Good debt: investments

Sometimes debt is good when you use it for a careful planned investment. A home is an excellent example of good debt. Purchasing a home is investment. It usually (but not always) gains in value. And, it is practically impossible to buy one without getting into debt. But, because you will like get back more than you put in, a home is considered good debt. It is an asset. However, you should realize that a home can also be bad debt. Avoid buying more house than you can afford. It is important that you go with more conventional loans (an interest only home loan can lead to problems). A home is only good debt if you buy prudently.

Another investment can be in stocks, bonds or mutual funds. If you have an opportunity for a solid investment, getting between three and five thousand dollars is not a bad idea, provided you have good enough credit to get a low interest rate. However, you should be aware that any investment can result in losing money. But if you research the investment, and the returns are likely to be solid, this might be considered to be good debt. Just watch the interest rate. You are unlikely to better your loan if your interest rate on the loan is more than 10% .