It’s become a common expression to use the terms “good debt” and “bad debt” (at least for the people who sit across the desk from me), but is there truth to that distinction? Are all debts created equal? Or can a good debt go bad? Let’s look at 3 common myths regarding debts, and what to look out for to maximize the good and minimize the bad.
Myth 1: All debt is bad
People who have been paying only minimums on a credit card for a decade are quick to say how expensive credit can be, and that everybody should avoid it. But in truth, going into debt for your education, a (preferably cheap) vehicle to get you to work, or a home that will appreciate in value, can all be sound investments.
Myth 2: Paying all your bills on time equates to good debt or good credit
Certainly, paying bills on time is a solid favor to your budget. But since the electric bill and cell phone aren’t technically borrowing money, they’re not considered debt. They don’t show up on your credit report, therefore, they don’t affect your credit score. Even some payments that are debt – such as payday loans or buy-here-pay-here car loans – can be considered “bad debt” because they are high-interest and don’t report to the credit bureaus. Meaning you’re paying a lot of money towards something that isn’t helping your future credit rating.
Myth 3: Small personal loans are the best debt for people seeking to build credit
This is false in two ways actually. High-interest personal loans can be some of the easiest to obtain, making it seem like an ideal place to start to build credit. While you do get “good points” for paying on time, having too many of them can actually lower your score, particularly if you renew them year after year. Contrast that with a single small credit card which can be kept open for decades (one inquiry, long history). Plus, with a revolving line of credit like a credit card, you can keep a low balance-to-limit ratio which boosts your score.
If you’re looking to build your credit score (and there’s lots of reasons you should), then you need to have some debt that you owe. Ideally, you want it to be low-interest, flexible options for payments or hardships, and something that nets you a gain in the long run.
Are you looking to boost your credit? Not sure what “good debt” and “bad debt” you may have on your report? Let Apprisen help sort things out. Give us a call: 800-355-2227. Don’t have time to work with a Financial Specialist right now, but want to get your assessment started? Use our interactive online submission to have our financial specialists review your finances and get back to you with a personalized action plan. It’s secure, confidential and at no cost to you.