Good Debt vs Bad Debt

Oscar Garner III

10.20.2020

Debt is essential for creating future wealth and achieving financial goals but taking on the wrong debt can be the difference between bankruptcy and prosperity. As aspiring future-oriented individuals, we must understand debt, credit, and your credit score (The Adult GPA). When released into the world your GPA no longer follows you, so lenders, employers, and professional organizations will judge you based on your credit score. Your credit score, simply put, is a measure of how you manage debt, and the sooner you can increase your score, the better.

Good Debt: Low-interest debt that increases your earning potential or net worth (in moderation). Timely payment on these debts not only raise your credit score but are easier to manage due to the focus on principle over interest. They also give you an asset that can be resold or skills that can be exchanged for income.

Student loans, mortgages, and small car loans are all solid options for good debt. Car loans and mortgages give you a manageable and usable asset that can be sold. While the car will most likely sell at a loss it can be utilized to create income. When signing a mortgage agreement, it’s important to have at least 20% equity at all times then leverage the home into either a rental space or sell at a profit. Student loans raise income potential, but it is important to actively pursue manageable repayment options.

Bad Debt: Expensive debt that can hinder the current financial situation. These debts usually come with high or variable interest rates and pertain to object that devalue quickly. These debts tend to eat directly into or replace the funds you would use to repay them. Taking on these debt expenses usually dig you into a deeper hole than where you started

High-interest credit cards, personal loans for discretionary purchases, and payday loans are all historically bad options when taking on debt. All of these debt classes are very similar as they do not contribute to any asset except cash. Most of these loans replace income instead of adding to it making them increasingly harder to pay off the longer you have them. These can detrimental to your credit as you take on more and more