Debt Vs. No Debt

Debt can be a dirty word for many people. Some may believe having debt means you can't manage your money. Others may consider it a warning sign that they're headed for financial peril. Not all debt is bad -- however, you don't want the bad debt, because it can hurt your financial situation. Whether you should carry debt or not comes down to the reason you have debt.

Good Debt

Good debt is accumulated by doing things that will help you in the future, such as student loans and a mortgage. A student loan is used to obtain an education, something that will benefit you throughout your life. Plus, you can earn that money back in your working years and will be able to pay off your loans. A mortgage helps you build equity by owning your home. When your home is paid off, your property often has appreciated in value --- which is typical unless a recession occurs --- so your mortgage debt may end up making you money down the road.

Bad Debt

Bad debt usually is anything that falls outside of a student loan or your mortgage. If you are accumulating debt by purchasing vacations, luxury items or anything else you can't afford, that is bad debt. This debt may be accumulating on your credit card, which often charges a high interest rate. As a result, your debt grows each month because you are paying fees for having a debt.

Why Get Rid of Bad Debt

Ridding yourself of bad debt has many advantages, such as owing less to creditors and improving your credit score. The less you owe your creditors, the less you will pay in interest. About 30 percent of your credit score is based on how much you owe. Your credit utilization ratio, as measured by the amount of debt you carry relative to your credit limit, influences your credit score. Getting rid of debt and lowering that credit utilization ratio will improve your credit score, allowing you to obtain better interest rates and easier approval for loans such as a mortgage.

Getting Rid of Bad Debt

If you need help getting rid of bad debt, consider a few strategies. Create a budget. Compare your expenses to your income. If you are spending more than you are making, cut down, so that you are saving -- or profiting -- at the end of each month. Use those savings to pay down debt by using one of two methods noted by the Consumerism Commentary website: the snowball method, in which you pay down your debts starting with the lowest outstanding amount and moving up, or the avalanche method, which starts with paying the debt that has the highest interest rate and moving down. If you need help, consider talking to a financial counselor.