Types of Debt
We will get to how to pay off your debt the fastest way possible in a moment, but I want to take a few seconds to go over the different kinds of debt as I see them.
I believe there are three kinds of debt. The first is Good Debt. This is debt that actually makes money for you. Examples of this type of debt include a home loan or a business loan. Anything that is going to appreciate over time or at least hold its value is what I would consider good debt. The best kind of debt is definitely a home loan. This is something that you buy that is proven to go up in value over time (as long as you take care of it and keep up with the maintenance). A home is something that acts like a payment to yourself. When you pay rent for a place to live, you are basically giving your money away to someone else. When you pay for a mortgage, you are paying for something that you will be able to sell latter for a profit, or at least get the money that you spent on the mortgage back. This could also be said for a business loan, but it is a little more risky as most businesses do not make it through the first year.
Now a Car would not be considered Good Debt. A car would fall into my next category, Nearly Bad Debt. Most people need a car. They need it to get back and forth to work. The problem is that for the most part (Unless you buy a Jeep or a Harley) any car will instantly depreciate as soon as you drive it off the lot, especially if you buy it new. Any loan you have for this investment will not be returned in monetary means like a house will. You can look at a car as a means to make more money. It gets you to work and back pretty reliably There are a few people out there who are fortunate enough to live within walking distance from their jobs, or do not have a problem taking public transportation. This is an alternative to investing in a car you may not be able to afford.
Finally, there is just plain Bad debt. This is anything you place on a credit card and don’t intend on paying back right away. The credit card itself is not bad debt. If you pay it off every month, it does not cost you a thing. If you let it hold a balance, you will be charged extra money that you really should not have to pay. This kind of debt actually costs you more and more money every month you leave a balance, needlessly.
My advice to you is to pay off all your credit cards as soon as possible and don’t use them unless you can pay them off every month.
Go back to the How to Eliminate Your Debt Page.
