Two Types of Debt
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Some of your debt might be considered as an investment. If the debt was incurred to purchase something that can be expected to go up in value and contribute to your overall financial health, then it’s very possible that such debt is good. A home purchase, for example, could very easily be considered as good debt. Since homes (generally) appreciate in value, the mortage loan that you incur to buy your house is actually an investment. Another example of good debt would be a student loan taken out to finance higher education. Obtaining a college degree usually means that you’ll make more money over the course of your lifetime.
However, just as there is good debt, there are bad kinds of debt as well. When you use debt to finance things that can be consumed, you generally aren’t accumulating good debt. This is the type of debt that creates an unhealthy financial situation. Credit card debt is usually considered bad debt because of the nature of the items that credit cards are often used to purchase. It’s wise to avoid accumulating debt on everyday items such as clothes or food. If you use a credit card for these types of purchases, be sure to pay the card’s balance off in full each month (doing so will allow you to avoid costly interest charges).
When evaluating your debt and overall financial situation, it’s usually a good idea to focus on paying off your bad debts first. Since they provide no value, they’re more costly to carry than your good debts. Credit cards and auto loans (which generally have higher interest rates) should typically be paid off before tackling mortgages or student loans.
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