Characteristics of Good and Bad Debts
Once you borrow a certain sum of money you acquire a debt. Generally speaking, debt can be classified as either a good debt or a bad debt. It’s really important to understand the difference between both because knowing the difference could save your financial life. In short, good debts generally increase your earnings. While bad debts decrease your earnings.
In other words, it’s beneficial to have a good debt since it will increase your current financial state of affairs. Some examples of good debt are education fees and home mortgage. On the other hand, a bad debt will damage your current financial position. Examples of a bad debt are contentious credit card debt.
Whenever you need to determine if you have a good debt or a bad debt use to following chart to do it more effectively:
Characteristics of Good Debt:
- Beneficial long term investment (education, own property).
- Increases your cash flow.
- Helps you earn more money.
- Creates a sense of safety and security.
Characteristics of Bad Debt:
- Used for consumption.
- Decreases cash flow.
- Eliminates possible future earnings.
- Creates a sense of instability and insecurity.