Good Debt, Bad Debt

Debt

Debt comes in many forms. A credit card, mortgage, personal loans and anything that must paid in due time. The lender will loan the money and it must be paid back with interest. The use of debt is to borrow people’s time from the future for the purpose of getting something now. We can call it spending the future away with interest. Time really is money.

When people buy a new iPhone with a credit card, they end up paying it by working in the next few weeks or months. Debt is a way to keep people working and have less free time to explore new ventures.

Is Having a Debt Bad?

It depends how debt is used. Debt is a tool for building a credit history. A good credit history means a good credit score. A good credit score means easier loan approval for a house, a car or to finance a business.

An unpaid debt is bad, and this lowers your credit score. A bad credit score leads to higher interest rates. The worst that a bad credit score can have is a subprime loan; it has an even more ridiculous interest rate which no one deserves.

There are debt users who spend it on partying or going on expensive vacations. These cost months or years to pay off by working. People often don’t see or just ignore the fact that they are paying interest rates at a prime.

Pay What You Owe and Stay Away from Collectors

Be aware of unpaid debt. If a debt is not paid long enough, this can go to collection agencies and it will be on the credit record for 7 years.

Good Credit Score Benefits

With a good credit score, people have the advantage of getting lower interest rates from their loans. They can get credit card approvals and higher credit limit approval. A higher credit limit is good for credit utilization which can also increases your credit score, if the credit card is only used for paying bills and necessities. If the credit card is used to pay for more than necessities, the credit utilization can affect the credit score in a negative way. Do your best to use less than 30% of your limit if possible.

Loans for a car, house and other big finances can be much at ease and you can also negotiate. With lower interest rates, the savings can be worth thousands of dollars just by having a good credit score. These big loans are sometimes the big step forward in people’s lives. Some loans can be used for big investments that can help people achieve their financial goals.

These are just few of the benefits of having a good credit score.

Assets and Liabilities

What are the things people buy? Are they assets or liabilities? An asset is something that generates money while a liability costs money.

If you are buying a car, buy one that you can already afford. Buying a car more than your budget is just a bad debt. Buying a house more than your income can handle? For as long as there are renters that helps pay the bills with extra profit, that’s fine. If you can’t pay the bills without a renter for a month, then someone will eventually be in trouble.

There are people who buy houses, cars and other expensive things but ends up working for the rest of their lives paying for them. It really is important to have an understanding on how to budget.

Good debts are spent on assets. You can buy a business and it will pay its own debt. An affordable car becomes an asset when used as a ride hailing service to generate income. If you purchase materials to sell, that will pay itself with a profit. A good debt is an asset that can pay itself.

Cash Flow

A cash flow is the equation of money coming in and going out. If you are making $4000 a month, it is your responsibility that you do not spend more than that.

It is recommended that one should at least save 10-20% of its earnings and have an emergency fund at hand that can pay 6 months worth of living. This gives you an extra room to adjust if you ever lose your job or have an emergency.

Many people who ignore their cash flow ends up spending more than they make. When that happens, they end up relying on their credit cards to pay things they can’t afford. This is also another way of entering a debt trap.

Debt Trap

A high debt burden can set all your future goals back. A debt burden can force people to work at a place they don’t want to be. Debt can take away people’s opportunity to explore or venture on to better things.

When someone uses debt excessively, this person could end up paying for a long time. There are cases of people who work until the age of 65, for the means of paying their debt. Only then they realize they worked for the things they have instead of working for themselves. There are also risks of losing what’s in your possession if not paid back.

A Good Debt Is a Leverage

A big loan from the bank could be an opportunity to buy a profitable business. By building the business and hiring the right people, the owner would find extra free time to work on more important things like generating more sales and profits.

There are people who also like to spend time looking for the cheapest properties to buy and rent them. When they do find the best deals, they purchase the properties using mortgage loans and rent them out for a profit. For as long as their properties are profitable, they will have the extra time to keep doing what they do best; Finding more income.

When renting a home is more expensive than owning one, it is a better investment to buy a home. Not only that it costs less in the long run, it can also be refinanced when interest rates are down. Refinancing can help save a few hundred bucks a year at least.

A good debt can be used as a leverage for businesses and individuals to earn profit and gain extra free time. An extra free time is great for reducing burdens and stress in life. Knowing how to leverage on debt can make life much easier.