Most Americans have debt. But this doesn’t mean most Americans are in similar financial situations by any means. Debt is such a broad term; it can apply to someone who just bought their first home, a recent graduate with student loans, someone with delinquent credit card balances, a family with medical bills, and the like. Although all these types of consumers face debt, there are differences in the nature of what they owe.
It’s important to know if you are accumulating good debt or bad debt because this distinction will affect when and how you repay it. Simply having “debt” isn’t necessarily a problem—it really depends on the type and amount. Here’s more on assessing your debt and coming up with a plan to eliminate it if need be.
What Makes Debt Good or Bad?
Trying to figure out whether your debt is good or bad? Here are a few questions to ask yourself that’ll help make the distinction:
- Is your debt helping you achieve financial goals? Or is it hurting your efforts?
- How high is the interest rate on your debt?
- Is your debt increasing your net worth or reducing it?
- Do you have a realistic plan in place for repaying your debt?
Good debt tends to carry lower interest rates and be a tool to help you meet financial goals. An example would include a mortgage that helps you obtain a home that’ll gain value over time, and which you have the ability to repay steadily over time. Another type of debt that can be good is student debt because ideally, it’ll help you secure a better job with higher earning potential in the future. An auto loan may be a form of good debt too because it’s necessary to get around.
Bad debt, on the other hand, tends to carry high interest rates and ultimately hinders your financial progress, possibly by dragging your credit score down over time. One telltale sign you’re facing bad debt is that you have nothing to show for your debt because it went toward something that lost value. The obvious example here is high-interest credit card debt, especially spent on something nonessential with dissipating value over time. Personal loans meant to cover everyday expenses—ones that build no value over time—are also generally seen as negative investments.
However, word to the wise: Any debt can become bad, even ones that started out positively.
Tips for Eliminating Debt That’s Gone Bad
Bad debt stands as an obstacle between you and financial freedom. So, it’s time to figure out how you’re going to eliminate it. Although it will take months or, more realistically, years to get completely out from under bad debt, you’ll be much stronger once you’re in the clear.
The debt elimination strategy you settle upon depends on the amount and type of debt.
Pursuing credit counseling can help you better understand your options and even settle on a debt management plan.
If you’re facing thousands and thousands in unsecured debt—like unpaid credit card balances that have gone to collections—then a strategy like settlement may be your best bet. Many Freedom Debt Relief reviews tell the stories of consumers drowning in credit card debt, falling behind on minimum payments and unable to fathom how they’d repay their balances in full. Since the goal of settlement is to get creditors to accept less than the amount owed, this strategy can be helpful for people currently unable to take care of bad debt on their own.
Consolidation is another strategy to explore, one that hinges on taking out a loan to cover your worst debts, then repaying that debt at a more reasonable interest rate over time. Just make sure you’re not paying much more in interest over the long haul, or in a position to default on that loan.
The first step is to understand whether your debts are good, or whether they’ve gone bad. Let this motivate you to find the best elimination strategy that’ll help you achieve financial freedom.