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What Nobody Tells You: Sometimes Having Debt Can Be a Good Thing

Posted By:  |  April 7, 2014  |  0 Comment(s)

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If there’s a single word that can make almost anyone shudder in fear, it’s the “d” word: debt. But what no one tells you is debt, although often considered to be a negative thing and something to be avoided at all costs, can actually be a good thing. Contrary to common beliefs, certain types of debt (when managed properly) offer many positives to both your current situation and your future financial goals, often allowing you to reach them faster.

Positive Debt on Your Financial History

Regardless of how fearful most people are of accumulating debt, the most honest reality is that at some point, almost everyone will need a loan. With property prices only rising, accumulating enough funds for a home is next to impossible for the average person, and a mortgage is almost always required to accomplish this goal. Student loans are another example of required loans, and even credit cards can be required to obtain certain benefits in today’s world.

The good news? In order to build credit history, you must have credit. And in order to obtain large loans, like mortgages, credit history is required. The longer the credit history and the more a person remains on top of their payments, the higher their credit score will be, and the more likely it will be for them to obtain a mortgage or large loan in the future.

Which Is Which? Good Versus Bad Debt

Another important thing to consider is the separation of debt into two categories—good and bad—as opposed to simply lumping all debt together in the “bad” category. Good debt comes in all kinds of forms that will benefit you in your current situation and help you in your future. Good debt can often help someone generate long-term income, such as a student loan that will allow you to obtain the education needed for a particular position that will sustain you over your lifetime. Student loans, with their typically low interest rates, are a good form of debt that is generally easy to manage and repay over time, and if payments are not missed, can help tremendously to establish good credit history and the future ability to take out a loan.

A mortgage to buy a home is generally considered good debt, especially with the low interest rates offered. Since the value of the property will increase over time, at times more quickly than others depending on the market conditions, the borrower will likely be able to reap the benefits of the financial gain.

Bad debt, on the other hand, can be considered money borrowed in order to obtain things that lose their value quickly and do not generate future income. Bad debt also comes with high interest rates, such as credit cards, and some of the worst kinds of debts are cash advances or payday loans which tend to have very high interest rates.

Often the key to managing debt and ensuring that you are only taking out good debt is to ask yourself whether you are gaining something positive—either now or later—from the source of credit. If the answer is no, you are likely getting yourself into bad debt. So avoid bad debt that creates the need for debt relief, and stick with the good.

Poll

  • How important is it to you for a debt consolidation company to offer financial education resources?
  • Takes your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full.
  • Negotiates with your creditors on your behalf.
  • Fee based on a percentage of your total starting debt or a percentage of the debt they save you.
  • Most settlement companies have you create a separate "escrow" account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.
  • Combines all your debts and creditors into one monthly payment.
  • Allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors.
  • You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.
  • Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.
  • Allows you to consolidate all your different debts into one personal loan that can be paid off over time.
  • Can offer borrowers a lower interest rate with a longer payback term (compared to high-interest credit cards or medical bills). This will lower the amount of money required to pay off the loan over time.
  • Personal loan debt consolidation can be an effective way to raise your credit score quickly (within 3-6 months).
  • Borrowers can receive funds from their loan within only a few days.

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