You might be facing a student debt balance that makes your stomach turn. While your debt may elicit a negative emotional response, many experts argue that student loan debt is most often good debt.
Debt can be either good or bad depending on several factors. Why does it matter how you categorize your debt? Different kinds of debt affect your credit score differently, which can affect your access to loans. A good credit score is essential to getting loans to build your wealth. Debt, in very simple terms, allows you to gain wealth.
Knowing the type of debt you have is valuable when you’re trying to improve your credit. Common sense advice may be to pay down your bad debt first. Some experts advise targeting your debt with the highest interest rate, which is very likely bad debt, so you pay less on it overall.
Another strategy is to pay off the smallest debt first to gain momentum after a quick win. Then, you could start paying more each month to pay down your other debt faster. For example, if you pay off a small debt by making $200 payments, once it’s paid off you can use those $200 payments toward the next debt you want to pay off, which could be a high-interest debt.
An easy way to determine if debt is good or bad is to look at what you get from taking it on.
Debt is often good if you get more out of it than you put into it. A mortgage is good debt because the value of the house you buy increases over time. So later, you’d be able to sell the house for more than you paid for it. Alternately, you could rent out part or all of the house and generate income.
A loan to start a business is good debt because your loan helps generate income that will ideally last much longer than the debt.
Many experts will say that student loans are good debt because they allowed you to get an education that will lead to higher earnings in your lifetime than if you had not gotten a college education.
When you use a loan for something that loses value, it is considered bad debt. A car loan is bad debt because the value of the car decreases over time. Unless you pay off your car loan quickly or with no interest, you’re likely to owe more on the loan than the car is worth at any given point. That means you would not turn a profit by selling it.
Revolving debt, like credit card debt, is bad debt for many reasons. First, items commonly purchased using credit cards lose value immediately, like clothing, food, and fuel. Second, credit cards have high interest rates. If you don’t pay off your balance every month, you’ll pay more for your devalued items than the receipt shows. Third, credit reporting agencies weigh your credit utilization heavily. That means that the more credit you use — especially if you use over 30 percent of your available credit — the lower your score might be.
There are always exceptions. Car loans can be good debt if you pay them off quickly or if your new car will reduce your overall driving costs — through lower auto insurance or fuel costs. Credit cards are good if you pay them off completely each month or you only use them for emergencies and you pay them down quickly.
On the other hand, any good debt that you can’t pay off becomes bad debt because it negatively affects your credit and prevents you from gaining wealth. Failing to make mortgage payments will result in losing your home. Investments can go badly and cost you money. Those hits to your credit score will make it harder to get credit in the future.
Similarly, student loan debt can be bad if you did not get a degree from it or otherwise cannot or do not benefit from it.
Options are available to help
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