Most of us don't want to be in debt - but to achieve many of our goals in life ¨C like owning a car or home, it is often necessary to borrow money and get into debt. Debt has become a common thing in the average American's life. The amount of personal debt in this country is ever-increasing and a large part of the reason is that credit has never been easier to get. Whereas credit-card issuers previously looked for customers who could repay, today card issuers relish the chance to reel in those who'll continuously charge beyond their means at 18% or 20%.
Debt is a complex concept. Not all of it is good -- a fact a surprising number of Americans fail to realize until they're in the hole -- and yet not all of it is bad. When used intelligently, debt can be of tremendous assistance in building wealth.
One of the secrets, therefore, to being smart with your money is to differentiate between good debt and bad debt. While the differences often seem logical, it is a logic that is apparently missed by many Americans.
Technically, good debt is debt that will create some type of value in the future.
For example, you go to college (and take out student loans) with the thought that you will make more money over your lifetime because of a degree. In other words, by going into debt to get a degree, you will have a larger income than by not having that degree.
Mortgages are also described as good debt because it is something that increases in value and there are tax incentives on the debt (deductions, credits).
Bad debt is debt that does not give you any type benefit towards your financial being or create value.
For example, if you use debt to buy consumer goods and you don¡¯t pay it off at the end of the month. You will be paying a lot of money (in the form of high interest rates) over the long run. Credit cards, if not used carefully, can be an example of bad debt, as they can be used to spend more than you earn.
Credit can be very useful, but the key is to spend only what you can afford to repay and to keep track of the debt you are building up.
Remember you will be required to repay what you spend ¨C along with interest, as well as fees associated with late payment, not paying the required amount or paying later than the required due date.