The word ‘debt’ may automatically have a negative connotation. Meanwhile, the term ‘credit’ can come out as positive, depending on the situation. The thing is, bad debt and good credit aren’t just terms to classify your credit grade. They are also used to identify the kind of loan you get. So how do you know if the loan is good debt or bad debt?
Any loan that will bring about improvement, pay off past credit or allow you to gain profit is considered good. An example of this is a business loan for entrepreneurial purposes. Another is the student loan to pay for your education.
It is bad debt if you use it for luxury items, or it brings you deeper in debt because of high interest rates. According to financial experts, an auto loan can be a bad debt no matter how practical you believe owning a car is. But some still maintain that it is a good debt depending on the model of the car, its price and use.
Signature clothes, jewellery, high-end appliances and furniture purchases made with any sort of loan may fall under bad debt. Even if they are essentials, if they don’t add funds or profit to your bank account, they count as bad debt.
You may be torn between good and bad debt. Decide wisely when entering a loan. Stick with the good loans, but if you ever feel the need to be ‘bad’ credit-wise, just make sure you can pay it back on time.