Debt is a four-letter word to many people. It’s become the primary source of stress for a growing number of consumers. But unless you’re independently wealthy, debt can be quite a necessity if you want to make a major purchase like a home or an automobile.

Consumer debt is on the rise, and so are delinquencies. Increasingly more consumers are turning to credit counseling to get their debt in check. Even though restrictions on bankruptcy have been tightened, people are still filing in record numbers. These statistics paint a grim picture of debt, yet consumers are still using their credit cards and taking out loans.

The truth is that debt is not such a bad thing in and of itself. It can help us in getting the things we need and want. The issue comes with taking on too much debt. It’s easy to get in over our heads if we’re not careful. And once we do, it becomes harder and harder to get rid of debt.

By learning about debt and understanding what is an acceptable level of debt based on our income, we can steer clear of the debt trap all together. And if we’re already in too much debt, there are steps we can take to reduce it.

Is there such a thing as Good Debt and Bad Debt?

Yes, there is such a thing as good debt. There’s only a few forms of debt have this distinction, but you need to know the difference. Some examples of good debt are:

Home Mortgage – Owning your own house has a number of benefits. Because your home is also an investment, it’s considered a good debt. As long as you keep up with the mortgage payments, you put yourself at an advantage by entering into debt because your home will normally appreciate in value over time.

Student loans – Getting a college education is a great investment as well. By earning a degree, you put yourself capable of enjoy better paychecks over your lifetime.

Business Loan – though starting a business can be a high risk venture, the rewards in the form of profits can be substantial. However, some of the assets you purchase will depreciate rather than appreciating. But for practical purposes, you can consider this a good debt.

There are lots of examples of bad debt. Below are a few:

Car Loans – For most of us having a automobile is essential, even though it’s still regarded as a bad debt. An automobile loses value over time rather than gaining it, so when it’s time to sell or trade you won’t recover your investment.

credit card debt – Although credit cards can feasibly be used to purchase things that appreciate, they are in general considered bad debt because of the types of things that are usually bought with them. The overwhelming majority of credit card purchases are things that lose value.

Personal Loans – Most personal loans are taken out on high tickets items such as furniture, appliances, or even vacations. These are often things we need, and a vacation can even help us become more productive, allowing us to potentially earn more. But none of these things appreciate in value, so they are considered bad debt.

Just because a debt is a so-called good debt, that doesn’t mean it can’t get us into trouble. It’s vital to keep our good debt at a manageable level. Lenders take our income into account when lending us money because of this. But it’s also essential that we look at our individual circumstances and not borrow more than we can comfortably pay back.

On the other side of the coin, bad debt is not always taboo. There’s no harm in taking on some bad debt to get the things we need and want. But the smart thing to do is keep it to a minimum, only using it for things we really need.

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