get out of bad debt

What is the Difference between Good Debt and Bad Debt?

You may have heard there’s good debt and bad debt.   So what is the difference?

Good debt helps you earn money, increase your future income or improve your net worth. For example, a loan to fund a certification course can result in higher earnings. A mortgage allows you to benefit from the appreciation in home prices.

But there’s also bad debt.

Bad debt includes any debt taken on when you buy something without lasting value, or that doesn’t help you improve your income or net worth. Credit cards due to shopping bills, or personal loans that fund holidays. So if bad debt is so bad, how can a person get rid of it?

Get Rid of Bad Debt

  1. Start by understanding. Make an accurate list of all debt, good and bad, by using your monthly statements. Include both the balance you owe, and the monthly payment you’re making. Then set a budget for your monthly payments. Bad debt often comes with very high interest rates. Target everything you can toward the bad debt. It’s important to be as disciplined as possible to pay down bad debt, faster than the minimum if you can.
  2. Once you’ve pulled together your list, the next step is to look for other ways that bad debt can be reduced. Sometimes bad debt can be converted to good debt. It might be possible to increase your mortgage at a lower rate and pay down a person loan at a higher rate.
  3. Or it may be possible to sell an asset such as shares to pay down bad debt. It’s important to consult a financial advisor or tax advisor as you think about the possibilities to make sure your plan doesn’t trigger any problems.

Once you have your plan, it’s a good habit to do a debt check every few months to stay on track. As bad debt goes down, you’ll be building a much higher level of financial confidence!

Want to create a solid plan and not only get out of debt but start planning for the future?

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