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Bad Debt Right Off

Good Credit? or  Bad Credit?

With credit easier than ever to get, mortgage rates on the rise, and U.S. savings rates reaching a 70-year low, it’s no surprise that total consumer debt has reached epidemic proportions, sitting at an all-time high of $2 trillion, excluding mortgages.

The good news? Not all debt is bad debt. There is such a thing as “healthy debt.” Consumers who understand – and learn to manage – “good” debt can be on the road to financial fitness quicker than ever.

Poorly managed debt can lead to trouble, but some types of debt can be healthy in limited amounts

Generally, only four types of debt can be healthy:

1.    Student loans -- Further one’s education and increase future earning potential.
2.    Mortgages -- Home ownership is an asset that can build equity and net worth.
3.    Necessary medical bills -- One’s health always takes priority.
4.    Business debts -- Often necessary to build a business and future earnings.

All other types of debt – especially credit card debt – create more problems than they solve. To manage personal business, most people need to own at least one credit card. However, multiple credit cards are not necessary, and consumers never should carry a credit card balance.

Healthy debt” must meet several qualifying criteria:

1.  The debt must be limited, without the ability to continue increasing (a revolving account, such as a credit card, is not limited, and increases as you add more to it).

2.  The debt’s interest rate must be stable, at a reasonable, predictable level.

3.  The debt must have regular payment amounts that are manageable within a budget, on time to avoid late fees and penalty interest-rate increases.

4.  The debt must have been acquired for a purpose that an average person would say was sensible. (A good test is whether you will be able to remember in six months why you have the debt

The debt is incurred for something that can appreciate, such as buying a home or investing in a business.

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