Financial savvy persons have no difficulty differentiating a bad credit loans or debt to good credit or debt. The clear distinction between the two helps individuals and companies to make wise financial decisions. It is not a clear-cut distinction that one is bad and the other one is good. It takes much more than that to distinguish the one from the other.
In general terms, a good debt is used to purchase an asset that appreciates in value or has some income potential such land or real estate property. Bad debt is used for consumption-based spending such as on cars, travel, electronics and luxury items. Simply put, if you are earning something from your debt, that is good. If you are not benefiting from your debt and are just paying for it, that is bad or not good.
Some examples of good debt are mortgages and student loans. If you acquired mortgage for a real estate property or your home, it is definitely good debt because as everyone knows properties do appreciate in value, despite the boom-bust cycle that the property sector goes through every now and then. A mortgage is also tax-deductible. What is not good is if you continue to pay huge monthly rent payments to your apartment or condominium unit rather than buying your own house.
Student loans of course are like investing in your future. It is better to incur debt in order to continue your education rather than drop out of school. A diploma is always a good security in landing a good job and earning a decent salary. Once employed, you can definitely pay off all your student loans.
There are a lot of good examples of bad credit or debt, the most popular by far is credit card debts. Many people fall into the trap of unpaid credit card purchases. Some think that buying consumer items such as clothes and electronic gadgets, which are on sale, is a good thing. But these people often use their plastics or credit cards for such unplanned purchases and are not able to pay it off within the billing period. Thus, they end up paying for that little black dress or fancy cellphone for twice their amount! And that is bad by any standards.
Many people with a great deal of wanderlust splurge on vacations and trips even if they cannot afford such luxuries. Thus they fall into a bad debt trap also. They would borrow money to travel to their dream destination or for a weekend out of town. They may feel rejuvenated after the trip, but they would soon feel stressed out looking for means to pay for their fare money. In the end, it is wiser to travel when you have the money to do so. Then it will truly be a hassle-free vacation.
For women, there is a lot more temptation to incur bad credit loans, mostly for vanity’s sake. There are dime-a-dozen offers from various spa resorts and beauty clinics to pamper or indulge through luxurious spa treatments or makeovers. But most of these so-called packages are really expensive. So they turn to the ever-reliable credit card and opt to deal with the consequences of their beauty regimen when the billing statement arrives.