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How to Classify Your Debt

Debt is never good to have, but not all debt is equal. Some of your debts are worse then others, and some debt is not as harmful as you may have thought. It is important for you know how your debts are affecting you. In order to eliminate your debts effectively you must know which debt you should eliminate first. Here are some tips to help you figure out your debts.

Examples of Good Debt

Remember, this is putting your debt in the context of overall debt. You should stay away from debt if at all possible. But when we say good debt, it means any debt that help by creating value. You may ask yourself how debt can helps you produce more wealth over time. Here are examples of good debt.

  • Mortgage debt
  • School loans
  • Real estate loans
  • Business Loans

These are all debt that you have invested in that can help you. If you have a business loan, then that means you are starting up, or improving your business. This will hopefully help you achieve more income in the near future. Your mortgage means that you have a house, and are gaining value in that home. Mortgage debt is the best kind of debt that you can have, especially if your house is gaining in value. If your house is more valuable then you know you will be able to sell your home and pay off that debt if you ever find you are in deep trouble. So even though you know that debt is something that you need to eliminate, having debt because of some loans may not be bad overall.

Example of Bad Debt

Bad debt comes about when you have no will power when it comes to items that are not necessities. This is often a result of weak organization and no budgeting. Here are some examples of bad debts.

  • Auto loan
  • Credit card/store credit card

Your auto loan is bad because cars break down easily. You do not want to have taken on multiple auto loans because your cars keep getting wrecked or broken down. Then they can really start to add up. Credit cards are trouble because you will be paying a high interest rate, and they can be trouble to pay off. Many people have multiple credit cards they have debts on because they are so easy to use. You should not borrow a lot of money to pay for clothes, because you will have to pay it back eventually.

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