Many people think of debt as a bad thing, and in many cases, they're absolutely right. However, there are several instances where debt can be a good thing, and can help you achieve your financial dreams. Here's a primer on the difference between good and bad debt.
The Benefits of Good Debt
There are types of debt that can create a a better life for you and your family. For example, taking out a mortgage allows people to own their own homes even though they are unable to purchase it outright. If everyone had to save up enough money to pay for a house in cash, there would be very few families out there who could afford it.
Another example of good debt is a car loan. Most people are unable to purchase a used car - let alone a new one - in cash. Owning a car is necessary for many people, especially if they need reliable transportation to their job (which provides income that can be used to pay down other bad debts).
Loans for investment properties are a third example of good debt. By taking a mortgage on a house and renting it out, you are effectively leveraging debt to increase your assets.
Bad Debt - What To Avoid.
Debt can be murderous, especially in the form of credit cards with interest rates as high as 30%. If you find yourself taking on credit card for items that do not appreciate - such as stereos, CD players and computers - you are fighting debt every step of the way.
If these bad debts (or good debts for that matter) get out of control, your assets may be at risk. Even if you miss a payment here and there, your credit score will more than likely go down, which increases your interest rate on current and future purchases. It's a vicious cycle: missed payments lead to higher interest payments, which are more difficult to pay... leading to more missed payments and even higher interest rates.