What Is Bad Debt And What Can You Do To Never Fall For This Booby Trap?5 min read
Debt in itself is not really bad; in fact, without debt, people cannot afford to buy their dream car or home, aspiring entrepreneurs cannot make build their future empires from the ground up, the whole economy will be reduced to nothing–or worse, there will be no economy at all. However, some people have a nasty habit of getting plunged into debt for no good reason at all. With that said, what are the main reasons why people get into bad debt?
Read: (How To Pay Off Debt Fast And Save Money This Year)
The good debt: yes, there is such a thing
It’s impossible to live a debt-free life; while most of us have to deal with debt one way or another, there is actually a kind of debt that is sensible and useful for your financial future and there is a kind of debt that merely sucks your money out of your wallet.
Good debt, on one hand, is a type of debt that is geared towards financial security in the future. While the person with good debt may owe money today, the rewards that will be reaped in the future are beneficial and will not leave you in a negative financial state.
Some examples of good debt:
- Getting a mortgage
- Borrowing to get a capital for business
- Getting a car loan, provided that you use it to save time on travel
- Investing in education or skills attainment (postgraduate education, Six Sigma Certification, etc.)
These samples are all good forms of debt, and they will, one way or another, benefit you in the longer run. Aside from providing you with long-term advantages and increasing your financial security in the future, good debt also trains you to manage your finances really well since you have to factor in your debt repayment in your monthly budget.
What about bad debt? What makes these kinds of debt so bad that they can take away your control of your finances and leave you penniless?
Read: (Pay Off Debt With Low Income In 5 Steps)
Introducing bad debt: everyone’s sworn enemy
Let’s talk about bad debt. Unlike good debt where you borrow money for something that will yield significant benefits for you in the future, bad debt is just debt that doesn’t pay off in the future. Although some people may argue that having bad debt is not a bad thing if you can pay it, the fact it provides no chance for that borrowed money to pay off in the future makes it one. Aside from no promises of returns in the future, bad debt is also unmanageable since most of them are made out of impulse, and there is no solid plan on how to repay that debt.
Some examples of bad debt:
- Swiping a luxury expense using your credit card.
- Buying a vehicle that is way above what you can afford.
- Owing money because of gambling and other vices.
- Spending money frequently on unnecessary expenses.
- Borrowing money to make ends meet.
When you fall in a hole of bad debt, it may be too late before you realize that the amount you owe has grown bigger than what you should pay. And even if you are able to pay it, there will be no returns in the future and the money you used to pay that debt will never go back. And you are left with nothing but bad records and messy finances.
Read: (Your Credit Card Debt Is Ballooning! What Can You Do?)
How can you avoid bad debt from hurting your financial life?
Fortunately, it is possible to avoid falling into bad debt as long as you know how to keep your urges in check and your finances in your grip, you can avoid having bad debt and be able to live a financially free life. Among the ways you can avoid bad debt are the following:
- Never swipe luxury items using your credit card. If you are thinking of buying a high-end smartphone or the latest laptop, you might have the urge to just charge the amount to your credit card. However, this is pretty reckless since you want to pay for something with the money that you don’t have. If you want to buy gadgets and other luxury items, pay for it in cash instead. Never charge it using your credit card.
- Buy a car for the convenience of travel, not for showing off. While it is true that owning a shiny luxury vehicle is something that can make you feel good whenever you’re behind the wheel, the practical side of it will definitely say otherwise. If you are going to have your car refinanced for more than five years and the monthly amortization will put a huge damage to your budget, you might want to steer clear from that car and pick a cheaper option instead.
- Do not gamble. Gambling may be addictive; after all, there is nothing more exhilarating than betting against fate or chance. However, gambling is so addictive that it is easy to succumb to its calling and next thing you know, you’ve burned all your money for nothing.
- Do not borrow just to pay off your bills. The idea of paying off debt with debt is something that can trap a person in an endless cycle of debt and poverty. If you cannot afford to pay off your bills, you should either cut down your basic expenses or terminate services that do not affect your everyday living.
Debt is neither good nor bad. However, what makes it one or the other is the way you use it. If ever you’re going into debt, make sure that it will pay off in the future–after you fully pay it, of course. If not, then you might want to think heavily about it and see if it can yield potential benefits in the long run, not just give you instant purchasing power with a high price in the end.