subject: Topsy-turvy World Of Debt Management [print this page] Is your head spinning as you try to figure out bad debt from good debt, debt "set points" and other pretty tough financial lingo? Well, let's get a few things straight, and some of the basics sorted out.
You might be asking, first, is there ever a time and place for debt? The answer is, "sure." Plenty of debts are so-called "good debts." There are complicated ratios and interest-rate things you can work out to be sure if you have a good debt or bad debt, but sometimes the best guide is plain common sense.
Generally, a good debt is one that gives something back to you that's worth even more than you paid for it. Think about your education. You may have taken out a student loan to pay for it, but that certificate should return you a better job, higher wages, and more opportunities in your career. Your mortgage is another good debt. Besides increasing in value over time, your house also provides a safe haven for you and your family. So this is also a good debt to carry. A car purchase is usually another good debt. It allows you to hold down your job, and provides safe and reliable transportation for you and your family. So going into debt to buy a car is another kind of good debt.
Some debts are less good. Generally, you can recognize them because the amount you pay for the item returns a lot less in rewards. Think about how much designer clothes cost, or just plain overspending on too many clothes. These types of purchases, especially if they're made with high-interest credit cards, are bad debts since they don't return the amount you pay for them. Indeed, many of these kinds of purchases do just the opposite-they fall dramatically in value the moment you remove them from the shop where you made the buy.
So, are you in bad debt mode? Some experts argue that if you can't pay off all your bad debts right now, today, you're in financial hot water. That might seem like a pretty tough measure-and for most of us, it might be too tough. But it's an interesting check. Could you pay off all your bad debts today, if you had to?
Your credit card might be a better red flag for debt. Could you pay off your credit card or cards today? The inability to pay off your credit card can act as a warning sign that you're getting in over your head with bad debt. If you always carry the maximum or near to it of your credit card's limit (or the limit on several cards) or you make only the minimum payment each month towards your credit card debt, you are in bad debt mode.
It's always good to know what kind of debt you're carrying, bad or good. If you have too much bad debt, it's time to start paying with cash and paying down those debts.
