These four types of good debt (student loans, home mortgages, medical bills, and business debt) can help you create financial abundance! Bad debt that brings money problems; good debt can help you achieve your financial goals.
First, a quip about debt:
“One of the greatest disservices you can do to a man is to lend him money that he can’t pay back.” ~ Jesse H. Jones.
You can actually do a favor for someone by lending him or her money — if you’re loaning money for the right type of investment! To learn more about good debt versus bad debt, read Create Unlimited Financial Abundance.
And, here are four types of good debt that creates financial abundance…
Good Debt Versus Bad Debt
“Poorly managed debt can lead to trouble, but some types of debt can be healthy in limited amounts,” says Brad Stroh, founder of Bills.com. “American culture is founded on consuming. Some purchases are necessary – for medical bills, education, housing. Others are purely for pleasure – none of us needs an iPod or a daily designer-coffee fix.”
Not all debt is bad debt – there is such a thing as healthy or good debt. The sooner you learn to recognize and manage good debt — and to recognize the difference between bad debt and good debt — the closer you’ll be to achieving your financial goals.
4 Types of Good Debt
- Student loans — Furthering one’s education can increase future earning potential.
- Home mortgage loans — Home ownership is an asset that can build equity and net worth.
- Medical bills — One’s health always takes priority, so paying health bills is a good investment.
- Business debts — Investing in your business builds it and secures future earnings.
Other types of debt are “bad debt”, and can create more problems than they solve. According to Bills.com, the average household now has 6.3 bank credit cards (such as Visa or MasterCard), 6.4 retail credit cards and 2.2 debit cards, for a total of 14.9 credit cards. The average interest rate on these cards is 14.24%, but there are no usury laws for credit card debt. If you miss a credit card payment, your interest rate can skyrocket over 30%. About 20% of all credit cards are “maxed out” by their owners.
To manage their personal lives, most people need to own at least one credit card. However, multiple credit cards are not necessary and can stop you from creating financial abundance (read Should You Close Old Credit Card Accounts? for more info). Consumers never should carry a credit card balance. Stroh advocates paying the full balance monthly, or using a debit card instead of a Visa or MasterCard credit card so that balances cannot accumulate.
If you have credit card debt, read 7 Smart Ways to Get Rid of Credit Card Debt Forever.
To be “good” — and to help create financial abundance — debt must meet these conditions:
- The debt must be limited, without the ability to continue increasing (a revolving account, such as a credit card, is not limited, and increases as you add more to it).
- The debt’s interest rate must be stable, at a reasonable, predictable level.
- The debt must have regular payment amounts that are manageable within a budget, on time to avoid late fees and penalty interest-rate increases.
- The debt must have been acquired for a purpose that an average person would say was sensible. (A good test is whether you will be able to remember in six months why you have the debt — coffee drinks or CDs usually can’t pass this test!)
- The debt is incurred for something that can appreciate, such as buying a home or investing in a business.
If you’re in the wrong kind of debt, read Debt Cures – Tips for Paying Off Your Debt.
If you have any thoughts on good debt or creating financial abundance, please comment below…