Debt is a common issue that affects every individual regardless of financial status. In fact, the world is drowning in debt either personal debt, national debt, credit card debt or even mortgage debt. There have been several analyses from economists with regard debt crisis and the reason why people need to be living debt-free.
But what exactly is debt that seems to consume all of our income and run our credit scores. Is debt a bad thing or good thing? Or is it important to have it in order to achieve some great things in life or not?
This article will clearly explain what you need to know about good or bad debt and also offer some advice on how to go about debt.
Talking about debt and credit is like discussing two sides of the same coin. They are both opposite to each other. Debt is when you owe something while credit is when you are receiving something. A person that receives credit is a debtor or borrower while someone that give a credit is known as a creditor.
Before you can be given a credit, there must have been a mutual agreement with the creditor specifying some terms and conditions by which the debt will be paid. Such agreement is usually referred to loan.
A loan usually includes the nature of time the debtor will pay the full amount of money owned plus interest he will be charged over time. The major types of consumer debt are credit card debt, home mortgages, car loans, student loans. Aside consumer debt, there is another type of debt which is known as public debt. This debt is money that is owed by governments. Other classification of debt includes secured and unsecured debt.
A secure debt is a debt that is backed with collateral while unsecured debt isn’t backed with any collateral.
Good Debt and Bad Debt
Although they are some people that can actually live a life completely free from debt, it isn’t necessary smart. Only few people earn money that is sufficient for their life’s most important purchases such as home, car, or college education.
The major thing to consider when taking a loan or incurring a debt is to know whether the debt incurred is a good debt or bad debt. Good debt offer long term income and grow in value. Example of good debt is getting student loans to finance a college education.
We all know that student loans usually have low interest rate when compared to other type of debt. Also, a college education will offer you opportunity to raise your potential future income. Another great example of good debt is mortgage or home loan. Mortgages have lower interest rates than other debt and the interest is tax deductible. Although mortgage could be long-term loans in most cases, it offers relatively low monthly payments that make it easy to keep the rest of your money for other purposes such as emergencies and investments.