Just like your financial situation, no two debt loads are equal. Everyone carries a combination of different types and amounts of debt, some of which can actually be beneficial. The tricky thing about debt is that it can quickly get out of control if you aren’t careful. Therefore, it is more important now than ever to get to know your debt up close and personally.
Good Vs. Bad Debt
For most people, debt is a way of life. While this isn’t necessarily a bad thing it is important that the bulk of your debt be “good” debt. Good debt is the type of debt that works for you. In other words, it is giving you something back. In general, a secured debt is a good debt because it is allowing you to work towards owning something at the end of the loan. Mortgages and car loans are good sources of debt when acquired in moderation and at a level you can afford to repay. Unsecured debts, such as credit cards, are generally sources “bad” debt. This is because they do not work for you or give you back much in the end. In fact, they generally cost you more than you would have spent to purchase the same item in cash. However, keeping a manageable unsecured debt balance can be a “good” debt as long as it is working to improve your credit standing.
The Tipping Point
Once the difference between good and bad debt has been established in your financial profile, it is important to know the tipping point. There comes a time in most people’s financial lives that bad debt begins to creep up and overtake good debt, creating an unstable balance. When this happens, it is easy for finances to quickly get out of control and debt loads to become unmanageable. You know you are reaching your tipping point when keeping up with your bad debt payments begins to interfere with your ability to maintain good debts. However, you have an opportunity to work with your bad debts through credit negotiations to lower the payments before your good debts become at risk of foreclosure or repossession.