What we'll cover
The differences between good and bad debt
How debt can strengthen your financial future
Tips for managing good and bad debt
Debt: Most of us have it, but very few of us want to talk about it. While it can be a stressful topic, well-managed debt is essential for building strong credit and a solid financial future.
Take this quiz to learn more about the good, the bad and best practices for debt management.
What is good debt?
Some debt is good as long as you're making regular, on-time payments and building equity. Good debt includes things like student loans, mortgagesand small business loans.
Auto loans can lean good or bad , but if your vehicle enables you to take care of necessities like going to work, buying groceries or taking your kids to school, you might consider a car loan to be a positive contribution to your life, as long as you're making consistent payments.
What makes them good? Over the long term, they're investments with tangible returns that will build equity. For instance, your student loan will get you a degree that can get you a higher-paying job. And your home will likely increase in value. It's this kind of wealth-building debt that can establish you as a reliable borrower.
Read more: Manage your debt payments with buckets
What is bad debt?
The darker side of debt includes anything that could be a sign you're living beyond your means (a red flag for vendors). Bad debt can include things like credit cards, personal loans and payday loans. If you're overextending yourself in the auto loan category, that might also be considered bad debt.
Keep in mind that not all of these will hurt your credit score as long as you're making regular, timely payments. However, if you have this kind of debt, it's important that you prioritize paying it off first.
How to manage debt
When it comes to paying off your debt, you have options:
The snowball strategy takes a slow and steady approach by starting with your smallest debts.
If you're dealing with too many lenders, debt consolidation can slim things down to just one payment and may reduce your interest rate too.
A professional credit counselor might be the right call if you've reached your breaking point. They can provide expert advice and help you start taking the necessary steps to lower your debt.
Find your balance
Whether it's good or bad, debt is a reality of almost everyone's financial life. By better understanding the kind of debt you have and your payment options, you can start taking the steps necessary to make it more manageable.
