“Good debt – is there such a thing” you ask? The answer is “yes”. Debt really exists in three forms, beneficial, non-beneficial and damaging or in other words, ‘the good, the bad and the ugly’. In this article we explore the differences between them so you can figure out which type of debts you have.
Typically speaking, a good debt would be something like a mortgage. This is because the loan is secured against property which in most cases; is an asset that grows or increases its value over time. Personal loans taken out to buy share portfolios and managed funds could also be considered good debts. However, this is only as long as the percentage of income generated by the investments is greater than the interest rate of the personal loan.
Bad debts are where a loan is taken out to purchase assets which depreciate in their value such as cars, computers, clothing or expenses such as holidays. Because of the nature of goods bought using this type of finance, personal loans and credit cards typically attract much higher interest rates than home loan interest rates. For this reason, it can be hard to get on top of personal debt as the interest comprises such a significant portion of the repayments. Many people also fall into the habit of only paying the minimum repayment amount, rather than paying extra and getting ahead. It can very quickly become a downhill slide and before long, debts spiral out of control. If you feel you might be at risk of falling into this situation or are already there, don’t despair as there are ways to reverse this.
Ugly debts include credit defaults. This is when a person has failed to pay a bill or loan repayment, despite repeated warnings from the company they owe. Credit defaults are forwarded to debt collectors as well as credit reporting agencies. Even when your default is paid in full, it will stay on that person’s credit file for up to seven years and severely reduce their ability to get any form of credit, including a mobile phones contract or plan. In addition, that person’s credit rating will be negatively impacted for at least seven years. Arrangements may even need to be made with creditors and can go as far as bankruptcy. If you find yourself in this situation or nearing this situation, you really need to consult a specialist such as Fox Symes who can help you to develop a debt management strategy. This will help you regain control of your financial situation and life by clearing your debts more quickly and improving your credit rating and profile.
Contrary to popular belief, not all debts are bad. It’s really about empowering yourself with knowledge so you can structure debt to your benefit. If however, you have bad and/or ugly debts, it’s time to take control and get off the debt mouse-wheel. In doing so, you really need to seek and gain professional advice and support to do it properly and turn your life around.