GOOD DEBT VERSUS BAD DEBT
You might feel that no debt is good, but this isn't true. There are times when taking on debt makes sense - for purchases that are almost impossible to pay for in a big chunk, such as buying a home as long as you have a plan to pay it off.
Mortgages are one kind of good debt. Sure, you're borrowing a lot of money to buy a home, but you're getting a long-term investment in return. Most homes will gain value over time, so that when the mortgage payments are done, your home will you hope be worth more than what you paid for it. Also, buying a home is more than a financial decision. It's a change in lifestyle. Becoming a home owner-and obtaining a mortgage to do it-will give you a terrific sense of accomplishment for you and your family. (You can get more information on the process of buying a home in my book How to Buy a homes Student loans are another kind of good debt. Education is an investment in yourself or your child. A college degree means that you'll earn more over your lifetime-as much as 73 percent more than those with only a high school diploma, according to the College Board.
Bad debt, by contrast, is just about every other kind of borrowing. It includes those items you're using a credit card to pay for. Very likely, they are items you can live without; and if you're not paying cash, these are probably items you don't need.
Bad debt in the form of credit cards will usually have a very high interest rate. And as I've already stated, it can take years to pay off, especially if you can't afford more than the minimum payment.
In general, it makes financial sense to keep your good debt, slowly paying it every month, because of the favorable interest rate and fixed monthly payment. But you should get rid of bad debt as soon as possible, paying off the credit cards with the highest interest rates first.
In Step 3, we'll talk about ways to eliminate your habit of building bad debt-by slowing down or stopping unnecessary spending, setting financial priorities, and learning how to live within your means.