The word debt is often seen as a dirty word. Let’s be honest, we would all prefer to have no debt at all. It is something to aspire to, though for homeowners it tends to be a dream reserved for later in life. But we need to reevaluate what debt is and what it means. Because not all debt has to be bad news or something to fear. With that in mind, Moolr took a look at good debt v bad debt.
Between 2014 and 2016, UK households owed on average over £3500 on credit cards, overdrafts and loans. It’s likely that this number is even higher today. The levels are increasing as the government has looked to boost the economy by encouraging personal debt.
In light of these figures, is it logical to assume that having debt is always a bad thing? Well, not exactly. While it’s usually bad to have many revolving credit lines and multiple debts, some of the debt you owe can actually be seen as good. Often it depends on how you manage it.
Good debt can come in many forms. For instance, having a mortgage can help you build your credit score through consistent on-time payments, as can any credit line. Your mortgage payments will tell future lenders that you are a responsible homeowner and know how to manage your debt. At the end you own a property too!
And some debts are worth having because financially they make sense. When borrowing money, always calculate if the debt is beneficial to you. If it is, and you are comfortable paying it of, there is little reason to stress over such debts. Borrowing is normal in any society.
Bad debt, on the other hand, is simply using credit to buy things you otherwise wouldn’t be able to afford. An example of this would be a person who has several credit cards that are at least halfway to their maximum credit limit, if not more. Lenders will look at this situation with suspicion. One conclusion they may make is that you aren’t skilled at managing money. This is told through the frequent use of multiple credit cards. The second is that it is only a matter of time before you are unable to meet your financial obligations.
That’s the key here. It is bad debt if you are loaded with interest charges that cost you money and also restrict your ability to pay off what you owe.
The best way to manage your credit is to show that you are a responsible borrower, by reducing your overall debt. A good guide is keep your balances below 30 percent of your maximum allowance and make all monthly payments on time. Once you develop a good track record this will improve your credit score and turn what was once bad debt into good debt as it is now manageable.