Use Your Debts To Acquire Wealth
Understanding What are Good Debts and Bad Debts
Many people will agree that we live in a world of debt, and many times our lives can be consumed with dealing with one debt or another. Personal debts are classified into two groups, ‘Bad Debt’ and ‘Good Debt.’ It may not be possible for most of us to live a debt-free life (very few can do this), but understanding the category of debt we have acquired can help us have a clearer understanding of our financial position.
Debts can serve a vital role in helping to enhance one’s financial position and build wealth. If debts are to be used as a vehicle to success, it will have to be used intelligently. The first element of this process is having a thorough understanding of debts. The general rule you can use to make a distinction between a bad debt and a good debt is your wants and needs. Wants generally are aligned with bad debts while needs are aligned with good debts.
- Good Debt: This term describes debts incurred for items that are truly needed to enhance your life. These items will generally appreciate in value.
- Bad Debt: Monies borrowed to purchase items that will only depreciate after it is bought are classified as bad debt. That said, bad debt is a rather complex issue. Not all bad debts are bad. There are good bad debts.
Examples of Good Debt and Bad Debt
Good debts include mortgages, educational loans, real estate loans and business loans.
Bad debts include credit cards, store credit cards and auto loans.
Using Debts to Increase Wealth
Remember, once an item starts losing value the moment you purchase it, it is a bad debt. If it has the potential of increasing in value, it is a good debt. Good debts are investment type debts. It is best to take on debts that are tax-deductible and will generate wealth in the long term. A bad debt such as a credit card can become a good debt when you use it to reduce another high debt. For example, a credit card can be used to acquire a loan at a lower rate for paying off or reducing a mortgage that is at a much higher rate. Credit cards can be used to get rid of debts that are excessively high, but you must pay attention to the rates that are charged, and ensure that it makes sense to take on that rate.
Using this information to guide any borrowing decisions you may make is a good way to help you stay away from accruing bad debts that will only hurt you financially. It is very easy and tempting for many individuals to take up an offer for a credit loan, but the consequences can be financially devastating. While loans are sometimes necessary, the decision to add one to your credit history should be carefully considered before actually going through with the transaction.
Whereas credit card providers used to target people who had the means to repay, they have now extended their drafting net to capture those who have a habit of living beyond their means.