If you watch TV or listen to the radio, you've probably heard people talking incessantly about debt. Some commercials advise you to take care of any debt problems immediately, while other commercials offer you credit cards that can expand your debt. If you're wondering what the big deal about debt is and whether it's good or bad, the answer is both yes and no.
Debt
Although purchases such as gas, groceries and entertainment set people's bank accounts back, those purchases are not considered debt unless placed on a credit card. Debt is considered money owed, such as loans, credit cards, fixed payments or due balances, such as a mortgage, rent or medical bills. Some debt, such as housing, is completely unavoidable. Anything that is not immediately paid for can be considered debt.
Good Debt
Good debt is essentially anything someone needs but cannot currently afford to buy. For example, buying a house or car typically requires someone to take out a loan. Even if the person has enough cash for the purchase, the transaction would likely cut deeply into his savings and put him in danger if any unexpected expenses occur in the near future. Examples of good debt include buying a house, car, paying for college and paying for surgery.
Bad Debt
Bad debt is the opposite of good debt. Bad debt is considered debt acquired by someone who purchases something nonessential with credit or a loan because that person doesn't have the necessary funds for an upfront purchase. Bad debt is completely avoidable. The reason bad debt is considered bad is because the debt is typically a poor investment. For example, purchasing a $2,000 sofa on a credit card with 15 percent interest will end up costing more than the initial $2,000 unless the person pays off the purchase immediately. Those types of investments cause people to lose money.
Credit Score
The amount of debt carried can affect a person's credit score. Credit card companies like to see people carry credit card balances of 30 percent or less. That means if someone has a credit limit of $1,000, they should never carry more than a $300 balance. Anything above 30 percent normally negatively affects credit scores. Credit card companies also take into account a person's total debt when considering that person for a credit card.
Financial Health
The decision to take on debt goes beyond whether the debt is considered good or bad. A person has to take into account his financial health before acquiring any debt. Someone who makes $7,000 per month can afford to take on the occasional bad debt as long as the debt is paid off before too much interest accumulates. Conversely, someone who earns $1,500 a month cannot afford to take on bad debt, because it's likely that debt will continue to grow and spiral out of control.
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