Debt is a serious problem for a lot of people and it is something that you need to be concerned about. However borrowing money is not always a bad thing there are times when debt can be a good thing. It is important to make sure that you understand the difference between good debt and bad debt so that you can make good choices when you borrow money.

The difference between good debt and bad debt in large part comes down to what the debt is for. In general it is considered to be good debt if the money is used in a way that it will increase your net worth. The most common example of this for most people is their mortgage. Most people obviously can’t afford to pay for their house in cash so they need to borrow money. This is normally alright since the value of their house is likely to increase over time so the debt is actually helping them rather than hurting them.

There are lots of other examples of good debt; money used to start a business or to invest is usually good debt. The debt doesn’t even necessarily have to increase your wealth directly to be considered good. For example student loans are considered to be good debt since you are making an investment in yourself. You should be able to earn a higher salary down the road as a result of the education that you get with the student loans so this is normally considered to be an example of good debt.

Bad debt is naturally just the opposite of good debt and it would include anything which doesn’t appreciate in value. The most common example of this would be your credit card. Of course you can use your credit card to make purchases that will increase in value but few people do. Instead a credit card is usually used for day to day expenses which will in almost all cases lose all of their value as soon as you use them. Combined with the extremely high interest rate that comes with credit cards this is bad debt in every possible sense.

In some cases it can be hard to determine if debt is good or bad because there is a lot of gray area. The best example of this would be buying a car. In general borrowing money to buy a car would be considered to be bad debt since the value will almost always go down. However it may be that the car that you buy is cheaper to operate and maintain than the one that you currently have. In this case the debt is no longer so bad; you have to determine if the money you save will offset the amount that you have to spend to borrow money to buy the car.

Source: cantrellhay.com

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Kollect Systems is an innovative tech platform provider with BankTech and FinTech software solutions which leverage AI based decisioning and workflow technologies to help lenders perform Debt Collections & Recovery (BankTech) processes effectively and for mid-size to large scale enterprise companies (FinTech), to automate Receivables, e-Invoicing & Payments better.

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Kollect Systems is an innovative tech platform provider with BankTech and FinTech software solutions which leverage AI based decisioning and workflow technologies to help lenders perform Debt Collections & Recovery (BankTech) processes effectively and for mid-size to large scale enterprise companies (FinTech), to automate Receivables, e-Invoicing & Payments better.

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