Understand Types Of Debt – A Quick Course

Thursday, October 14, 2010, AM | 10 Comments

To get out of debt, you have to first understand that as a financial topic, debt is very simple. It doesn’t take very long to get into debt. It takes lots of spending and spending more than you make.

If you are in debt and heavily in debt, think about the interest rate when you deposit money in your savings account – these days maybe less than 1%. But borrowing money will cost you anywhere from 10% to as much as 30% on some credit cards.

  • Good Debt

    Most folks seldom realize that borrowing money is actually renting it. Whatever you rent, you must return it one day and as soon as possible. There are good debts and bad debts. You can expect to get some return and actually can make some money with good debt. For example, you borrow mortgage to buy a home. You can expect that one day it will appreciate in value and will give you a better return than you pay in interest when you stay in the home for a considerable amount of time. In short, good debt combines a low, tax-adjusted interest rate with the potential to gain something that appreciates in value.

  • Bad Debt

    Bad debt is something that can drain even the last drop of your financial life and it has done so to so many folks in the form of bankruptcies and foreclosures. And this happens because it is not easy to get out of bad debt. It’s going to take discipline to bury the debt monster. Anybody who says otherwise is probably just after your money. Debt management can work only when you follow very strict and disciplinary steps. Otherwise you would be spending more money and that will get you into more bad debt.

  • Easy Debt

    A consistent pattern of spending just a little more than you make, over time, can lead to a serious problem. It doesn’t happen in just one day. When you spend more than you make, the extra money that you spend comes out of the pocket of someone else and you must pay the cost of borrowing plus the principal. If you keep it up, before you know it, you are in deep shit to the point that it starts smelling from bad to worse. And when the smell becomes unbearable, you file for bankruptcy. These days some folks don’t even regret their reckless spending behavior – no remorse whatsoever.

In a Nutshell
Compound interest is a powerful force that works either way – for you or against you. If you want it to work for you, then you have to ignore advertisers and bankers and don’t let them have compound interest work for them.

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