Good Debt vs. Bad Debt — Is There a Difference?

Between 2008 and 2010, UK households owed an average of £3,200 on credit cards, overdrafts and loans. It’s likely that this number is even higher today.

In light of this statistic, is it safe to conclude that having debt is always a bad thing? Not exactly. While it’s usually bad to have too many revolving credit lines or delinquent accounts, some of the debt you owe can actually be seen as good, depending on how you manage it.

Good Debt
Good debt can come in many forms. For instance, having a mortgage can help you build your credit score through consistent on-time payments. Your mortgage payments will tell future lenders that you are a responsible homeowner and know how to manage your debt.

Bad Debt
Bad debt, on the other hand, is simply using credit to buy things you otherwise wouldn’t be able to afford. An example of this would be a person who has several credit cards that are at least halfway to their maximum credit limit. There are a couple conclusions a prospective lender might make about this situation. One is that you aren’t skilled at managing money. This is told through the heavy use of many credit cards. The second is that it is only a matter of time before you are unable to meet your financial obligations.

The best way to manage your credit is to show that you are a responsible borrower by reducing your overall debt. A good rule of thumb is to keep your balances below 30 percent and make all monthly payments on time. Once you develop a good track record this will improve your credit score and turn what was once bad debt into good debt since it is now manageable.

The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.

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Jennifer Gueringer is a Social Media Associate at Enova International, Inc., and is interested in finding new and creative ways to be financially savvy. Find out more about her on Google+.

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