Bad Debt vs Good Debt

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What Is Good Debt?

You would be forgiven for thinking that all debt is bad, but that simply is not the case. Good debt gives you the opportunity to manage your finances in a more effective way, to leverage your wealth, to deal with unexpected emergencies, or to buy things you need. Essentially, this type of debt benefits you in the long run. Some examples include taking out a mortgage, borrowing to cover education costs like a student loan, or a bad credit debt consolidation loan to pay off existing debts. While the debt may put you in a hole initially, you may be better off in the long run for having borrowed the money.

Mortgages – investing in a bricks and mortar house has been a long term investment choice for many people for years. In most cases, people can look forward to their home increasing in value over the years. There may be some fluctuation in the housing market that could see your home price drop temporarily, but over the longer term, you could be likely to make a profit.

Student loans – with this form of debt, you are investing in your future employment prospects. For many people, a University degree may enable them to reap the benefits of a higher paying job with better career prospects. While this does mean that you are starting your career with large debt, this is offset by the low interest rates and the fact that you will not be required to repay until you are earning a certain amount.

Debt consolidation loans – when your bad debts start to mount, you may try to find ways of better management and possibly paying them off quicker. That is where consolidation options can come in, whether you need a debt consolidation remortgage or a secured debt consolidation loan for potentially lower interest rates. These types of loans help you to pay off your existing debts with the exact amount needed, and owe money back to a single lender, giving you peace of mind.

What Is Bad Debt?

On the other hand, not all debt is good and bad debt is a lot easier to spot. If the money you borrow loses value the moment that you take ownership, it could fall into the bad credit debt category. This includes credit cards or payday loans. If these debts are not managed carefully, or if you borrow too much and cannot pay it off, they could have a negative impact on your finances and credit score. However, despite these types of credit being considered bad, if you are able to pay them off in full and on time, you may see a boost to your credit score.

Credit cards – unless you are wisely using a 0% interest purchase credit card, items that are bought using a credit card tend to come with relatively high interest rates. This means that if you do not pay off the whole amount every month, the money owed in interest may quickly overtake the value of the purchased asset. This can become worse if you use the card that leave you with no discernible assets, such as holidays or restaurant meals.

Payday loans – this type of loan is typically intended for small amounts taken out over around 30 days or less. Due to the short repayment term, the interest rates on payday loans can be very high or around 1000% per annum, so these can quickly escalate to be a highly expensive way of using credit. While this type of loan may seem attractive for unexpected situations or emergencies, it is key to remember that it may be a costly way to borrow.

How To Avoid Bad Debts

Avoiding bad debts as much as possible can be much better for your finances in the long run. While it can be beneficial to use a credit card to boost your credit rating, it is essential to use a 0% interest card, pay off the balance as soon as possible, and keep your usage to a minimum. Here are some tips if you would like to avoid negative debts completely:

• Budget correctly – it may sound obvious, but any good, long term financial plan starts with a sound budget. Take your monthly income, essential spending, and other financial commitments into consideration. Try and identify any areas where you can reduce your spending, and find out if there are cheaper alternatives available. You should also consider switching your bills to direct debits – this way, you won’t need to remember to pay and you may get a better deal.
• Use comparison sites – there are plenty of comparison sites available online with calculators to help you find the best deals on loans, utilities, mobile phone contracts, and so much more. You could save a lot of money in the long run by searching for the best deals, helping you to build up your savings account for emergency payments or a treat.
• Avoid impulse purchases – we know how difficult it is to not spend on a whim sometimes, but cutting down on takeout coffees, buying lunch every day, or treating yourself every time you go to town, you could see a great boost to your savings. Sure, it’s healthy to treat yourself every once in a while, but not too often.
• Spend less on occasions and Christmas – it’s only human to want to spoil your family and friends on occasions or Christmas, but you should try to rein it in as much as possible. Avoid using loans, overdrafts or credit cards to finance your spending, but if you need to use some form of credit, make sure you start repaying the debts as soon as you can.
• Set financial goals – when you set yourself some concrete and achievable targets, you can hold yourself accountable and track your own progress. These goals can be as little or as large as you need, but they should be realistic to help you stay on the right lines.

These are just a few suggestions on how to avoid bad debt, but there are many more options to try. If you need any more support or help with bad debt recovery, please reach out to the Money Advice Service for free and impartial help.

Choose Us For Your Consolidation

If you need help with covering your existing debts, such as credit card debts, we may be able to help. At Debt Consolidation Loans, we make our lending decisions with a personal touch, rather than relying on automated software. We hold our applicants’ best interests at heart, and manually review each application for affordability and to understand your needs. We consider all applications from people in all circumstances and will do everything we can to ensure you can make repayments. However, if we felt that you would struggle to make repayments, we would need to decline your application for your own wellbeing.

We aim to offer flexibility in our repayment plans, so you will be able to make payments on a pre-agreed date each month that works with your budget. This can help you to manage your finances, as well as give you peace of mind. We are also completely transparent, so our soft search will not damage your credit rating and there are no fees for using our service.

If you would like any more information, you may find what you’re looking for in our FAQs, or you’re welcome to contact us. When you’re ready, it’s quick and easy to apply on our website.