Bad Debt Vs. Good Debt: A Guide To Good Money Management

In today's economy, people tend to think that any debt is bad. While the ideal is to live debt free, that is not possible for many people. It is true that many types of debt will only hurt you in the long run, but there are some types that can be good for you. Learning to differentiate bad debt vs. good debt is an important aspect of wise money management.

What Is Good Debt?

In a nutshell, good debt is any type of debt that will benefit you in the long run. In other words, any debt that provides you a net gain can be considered good. This means financing a purchase which will appreciate in value, or paying for educational opportunities that will enable you to get a job with higher pay. Although you have to take out debt to begin with, in the long run you will be better off for having done so.

A classic example of good debt is the student loan. Taking out a student loans enables you to go to college or to pursue career training, which will pay off by helping you find a better career with higher pay. At least it should, its not advisable to borrow solely to get a degree in basket weaving as the saying goes. Student loans become bad debt if you choose a major that will not get you a good job. However, simply possessing a degree may open more doors to you, so it may still be good debt if you use it to further your goals.

Mortgages are another example of a situation where the distinction between bad debt vs. good debt is not so clear. If your house appreciates in value, then it is good debt. However, with the collapse of the housing market many people are finding themselves upside down on their mortgages, which means you may owe more than your home is worth. That can quickly turn it into a poor investment.

As you can see, it is important to carefully choose what good debt you take on to make sure it actually will pay off in the end.

However, if you plan carefully you will likely benefit and you can work to invest only in good debt and work to move bad debts into the good category.

What Is Bad Debt?

Bad debts are any balances owed on an item that depreciates, or decreases in value. For example, using a store credit card to buy clothing is bad, because the first time you wear that clothing it will be worth much less than what you paid for it. Sometimes this kind of debt is almost impossible to avoid, such as if you lose your job suddenly and need to put some expenses on credit cards to get through.

However, that should be paid off as quickly as possible and efforts made to avoid this type of borrowing.

Car loans are another classic example of bad debt. They may be necessary if you need transportation and cannot afford a car on your own, but you should strive to minimize the amount you owe and pay it off quickly. Cars depreciate very quickly, particularly luxury cars or other more expensive vehicles.

If you are having trouble determining whether something is bad debt vs good debt, just ask yourself whether it will be worth more in five years than it is now, or whether you will make more money off of it.

For example, a student loan could be good debt, but a personal loan taken to finance a vacation would be bad debt. One will pay off in the future, while the other will just leave you paying a lot of interest.

Bad debt is easily avoided by living within your means and saving up for large purchases rather than giving in to the temptation of putting them on a credit card. Even borrowing from friends or family in a pinch is better than paying on a high-interest credit card.

Getting Out Of Debt

If your ultimate goal is to become debt free, the best way to do that is to focus on getting rid of your bad debt first. Pay the minimums on any good balances you have, but pay substantially more than the minimum on bad debts. If you are just paying your minimum credit card payments every month, you will be paying them off for a long time and paying much more in interest than you need to. Credit cards generally have higher interest rates than mortgages or student loans as well, so it makes sense to pay the cards down first. Once that is done, you can begin focusing on paying off your other bad credit lines and avoiding any additional borrowing.

Figuring out which is bad debt vs. good debt can be tricky at times, but is fairly straightforward if you keep in mind the 5 year benefits test. The most difficult part about it is being totally honest with yourself. Think carefully before you take on any new debt in order to make sure you are making choices that will benefit you in the long run. With a little careful planning and practice it will be easy to make good financial choices.

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Highly Effective Bad Credit Debt Consolidation Programs

If you are having trouble because of your poor credit rating, then bad credit consolidation may help you resolve your problems. Consolidating your debts into a single account is convenient. It will also help you manage your finances and improve your credit rating. You may be able to eliminate your debt much faster than making minimum payments to your creditors.

One reason why we acquire numerous debts is our impulsive and incessant use of our credit cards. We buy lots of unnecessary and unessential things that we charge to our credit card and then we find ourselves knee-deep in debts. We spend so much even though we can not afford to pay it. We tend to live our lives way beyond our means.

We will only realize this mistake once we are pushed to the limits of our financial capacity. When we find ourselves deeply in trouble because of our unpaid bills and our creditors begin calling us demanding payments. We feel anxious and stressed. We try to find a fast and easy way to get out of the situation.

One easy way to get out of debt is through debt elimination. Debt elimination is the fastest method (other than bankruptcy) of wiping out credit card debt.

Debt elimination is a program designed to help you get out of debt in about 2 4 years time. It also reduces your monthly payment up to 60%. If you are being harassed by debt collectors, debt consultants will employ various strategies to eliminate or reduce harassment.

Another way to resolve your poor credit rating and settle your debts is through a bad credit debt consolidation loan. In consolidating your debts into one account or credit, you will only make one monthly payment. This will ensure that your finances are more manageable. In addition, you will be able to save on the amount that you are paying each month as well as the total amount of interest you have to pay.

Bad credit consolidation will also improve your credit rating. How? because your new loan will pay-off all your credit card debt. Credit bureaus look at this type of debt as "bad debt". Therefore, when it is paid off, your credit score will rise.

So before you lose your chance of improving and saving your credit record, you have to make certain that you resolve your financial difficulties. Debt elimination can greatly help you in straightening out your problems. Bad credit consolidation can considerably improve your credit rating and reconcile your finances.

Debt Free Solutions is a debt consulting company located in Long Beach, CA. We have been in business for 10 years. We assist Americans across the U.S. to eliminate excessive credit card and other unsecured debt.

We utilize various programs and strategies to aid them in dissolving their debt in the quickest, safest, and most efficient method possible. We also analyze the risk factor. We structure our programs to drastically minimize the risk that is inevitable with all debt elimination programs.

We offer our clients much more than a debt settlement company does. The vast majority of debt negotiation companies simply settle your debts on your behalf with your creditors- nothing more.

On the other hand, we provide free services to significantly help to minimize the risks that are involved in negotiating with your creditors.

First, we offer a free, no-risk 10 day trial service. During our free trial, we negotiate with your creditors on your behalf to lower your interest rates. Also, we research to see if you have any old debts that you are not legally liable to repay. If, for any reason, you are not completely satisfied, you simply walk away. No commitments. No contracts.

Next, we provide a comprehensive credit repair service to all our clients. This is a 5 service that is absolutely free!

Also, we offer free attorney consultation (a maximum of five sessions) in case one or more of your creditors makes any threats.

Last, we provide a written guarantee that our clients' creditors will settle for an average of 50% or more for all of the debts they attempt to negotiate.

Our services are competitively priced- and include the above free services!

Joseph Hernandez
CEO
Debt Free Solutions
www.debtfreesolutions.mobi
(800) 668-8090

Chapter 13 Bankruptcy Or Debt Settlement: Which Is The Best To Alleviate Debt?

There was a time when failure to repay debts meant creditors could take their debtor to court, and seize what assets they had left, leaving them bankruptcy. Today, debtors can choose how to rid themselves of insurmountable debts. But whether Chapter 13 bankruptcy or debt settlement is the best option depends on the situation.

There is no doubt that the pressure created by mounting debts can be crippling, and at a certain stage something is going to break. For all debtors, the issue is how to manage removing debts they simply cannot pay in full. In some cases, choosing Chapter 13 seems the right move, but the consequences can severe.

The alternative is to agree a debt settlement program with creditors, so that some of the debt is paid. But this can be costly in the long run and is never final until the last payment is made. So which is the best choice? Understanding each option is the key.

Understanding Debt Settlement

There is an idea that, whether opting for Chapter 13 bankruptcy or debt settlement, clearing debts without repaying them in full is a cheap way out. In fact, a settlement ensures both sides of the table gain and lose something.

Settling debts involves some tough negotiations in order to reach an agreement with a creditor to pay a certain percentage of an existing debt. It might be 65% of the debt, which is a welcome reduction, but with a very good negotiator, it could fall to 30%. This is quite different to choosing Chapter 13, which might see 100% written off without payment.

However, while a debt settlement program does require some money to be paid, the key advantage is that credit is only affected for 2 years by this measure, whereas Chapter 13 rulings stick to a credit report for a decade.

Understanding Chapter 13 Bankruptcy

Bankruptcy is often seen as the only way to escape crippling debts, if they cannot be repaid in full. But the ability to opt for Chapter 13 bankruptcy or debt settlement means the strict consequences do not have to be faced. Still, Chapter 13 of the Bankruptcy Code offers its share of positives as well as negatives.

This specific type of bankruptcy case is fast becoming a preference replacing Chapter 7. This is because Chapter 7 was like a surrender, claiming an inability to pay anything and having the stigma remain for decades. Choosing Chapter 13 means a more cooperative approach is taken.

The Chapter provides a means test to calculate what percentage of the debt can be repaid. Perhaps 100% of the debt is written off, but more often than not, 40% or 50% is. So, some money is repaid. It mirrors a debt settlement program, but the credit report still carries the reference to bankruptcy.

Identifying The Best Option

So, when considering whether Chapter 13 bankruptcy or debt settlement is the best option, how can a decision be reached? The key to that is the specific factors in your own situation, and applying the terms of both to them. This way the best outcome can be identified fairly quickly.

Bear in mind that individuals have to apply for bankruptcy, and not everyone is successful. The first step is to compare your income over the previous 6 months with the average income in your state. If it is lower, success is probable. Also, remember that choosing Chapter 13 involves a means test, so your claim to have 100% debt written may not be upheld.

The debt settlement program, in contrast, does not take place in a courtroom, and so there is no legal bind to what terms are agreed. Hiring a professional debt settlement negotiator is necessary to seal the best deal, but despite the cost, it is worth considering to maintain debt credibility.