Healthy Debt vs. Bad Debt | CCCS of Rochester
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Healthy Debt vs. Bad Debt

Is there really such a thing as “healthy” debt? It’s true that the word “debt” has negative connotations, but most financial experts agree that certain kinds of debt can be healthy. While any debt has the potential to become bad, debt is considered “good” when it is taken on with the likelihood you will increase your income over time and overall net worth.

Loans and expenses taken to pursue higher education are considered to be positive because education and specialized training provide the means to get a better job with a larger income. The same goes for making investments toward an established business that will pay you dividends or taking out a small business loan to pursue a passion in your profession. Owning real estate or buying a home helps you to grow your assets, build equity, and adds to your continuing and growing financial stability and health.

Most people have experienced the pangs of bad debt at one point in their life, even those who are otherwise financially healthy. Credit card debt is one of the leading causes of bad debt. High interest rates and low monthly payments make it harder to pay off the balance the more you spend. The bottom line is this: Credit cards don’t increase your net worth. So, if you have a credit card, whether it’s to build credit or because it offers a reward bonus, maintain financial health by paying off the balance every month.

It may come as a surprise to some, but taking out a loan to buy a new car is also considered bad debt. As soon as a car leaves the lot it starts to depreciate in value. Many experts advise that purchasing a used car is the better financial decision. In addition, purchasing clothes, eating out, and entertainment are all considered depreciating assets, though of course everyone needs clothes and to have a little fun, so moderation is often the best path.

Overall, everyone’s situation is different and whether the decision to take on debt is a bad or good decision depends on each person’s individual income to debt ratio and overall financial situation.