Good Debt vs. Bad Debt

The term debt usually carries a negative meaning to it. You must have been advised against taking loans and debts by your elders. But it is not always true. There are good debts also. You must be surprised as to how something as blemished as debt can be considered good. There is quite a possibility that some of your debt may be favorable.

What constitutes a debt as good or bad?
Well the difference lies in the logic.

Good Debt
If you use the debt to purchase asset, and the value of the purchase asset increases which assist in building your financial status. It is then considered as a good debt. Good debt allows you to buy something that will provide you an income. You can consider your good debt as an investment.

If you purchase a home, it will be considered good debt. Normally, the value of a home increases with time, so the loan taken for home will be qualified as good debt.

If you have taken a student loan to pursue your college education, this will be also considered as a good debt. Because getting a college education implicitly reveals that you will be able to make an earning in the future with this college degree.

You can use debt to buy assets that generate cash flow.

Advantages of taking good debt

Debt is a tax-free amount. If you borrow a large amount from somebody, it is not taxable. But if you earn a good amount, it is always taxable. This is applicable to bad debt also. So take wise decision and take only good debt.

Good debt increases your income by purchasing assets which appreciates in value, whereas in bad debt, your income decreases by taking money out of your pocket.

Bad debt
If you are financing things for the purpose of consumption with the help of debt, this will be considered as bad debt. Bad debt has a negative impact on your financial status. Bad debt is that debt which you need not have and cannot afford to pay.

Credit card debt is often considered as bad debt because you tend to buy things like clothes which are going to be consumed. You should never use debt to purchase things for your everyday needs.

If you use debt to pay for a vacation, it will be also considered as bad debt as vacation doesn't increase in value. Obviously, you will feel good after the vacation, but it will not give you any financial benefit.

Smart Decisions
So if you are able to differentiate between good debt and bad debt, use it smartly. Your financial success will depend upon your ability to take intelligent decisions.