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(image: https://i.pinimg.com/originals/cb/73/15/cb73151ce7087c38b0d77ab9c17aaeb0.jpg)Good Debt is different from. Bad Debt: Learn the distinction
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Good Debt is different from. Poor Debt Know the Difference
Good debt can help you achieve goals, while bad debt is expensive and could derail your goals.
Written by Sean Pyles Senior Writer | Personal finances and credit, and personal finance Sean Pyles leads podcasting at NerdWallet as the producer and host of the NerdWallet's "Smart Money" podcast. On "Smart Money" Sean talks with Nerds on NerdWallet's NerdWallet Content team to answer listeners' questions about personal finance. With a particular focus on sensible and practical advice on money, Sean provides real-world guidance to help people improve in their finances. Beyond answering listeners' money concerns on "Smart Money" Sean also interviews guests outside of NerdWallet and also creates special segments to explore topics like the racial wealth gap as well as how to get started investing and the background for student loans.
Before Sean took over podcasting at NerdWallet He also covered issues that dealt with consumer debt. His work has appeared in USA Today, The New York Times as well as other publications. When Sean isn't writing about personal finances, Sean can be found working in the garden, taking runs and walking his dog for long walks. He is based within Ocean Shores, Washington.
Updated on Feb 21 2023
Written by Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, financial management and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. Prior to joining NerdWallet, she worked for 18 years working at The Oregonian in Portland in capacities such as chief of the copy desk and team editor and designer. Previous experience included news and copy editing at many Southern California newspapers, including the Los Angeles Times. She received a bachelor's degree in mass communication and journalism in Iowa's University of Iowa.
The majority or all of the items featured on this page are from our partners who compensate us. This impacts the types of products we review as well as the place and way the product is featured on a page. But this doesn't influence our evaluations. Our opinions are our own. Here is a list of and .
Before taking on any debt, consider whether a car loan or new credit card will help meet your financial goals or make them more difficult to achieve. The amount you pay and the amount and cost, can be the difference between good debt and bad debt.
A credit card, for example, is an option to finance large expenses and earning reward points. If not handled properly the credit card debt that comes with high interest could become out of control.
These are the general guidelines for good debt and bad debt, one and the best way to handle it in the event of having an excessive amount of debt.
What is good loan?
Low-interest debt that helps you increase your income and net worth can be an example of good debt. But excessive amounts of any kind of debt, regardless of the potential it may create can turn it into bad debt.
Medical debt, as an example, doesn't neatly fall into"the "good" as well as "bad" debt class. It's a cost that is largely uncontrollable and often doesn't have an interest rate. There's a chance .
Student loans
In general, considered to be an investment for your future and future, student loans typically have lower interest rates, specifically in the case of federal student loans.
The general rule is to try to have your student loan amount to be less than 10% of your expected after-tax income per year after graduating. If you expect to earn $50,000 per year, the borrowing cap will be $29,000.
Take action: To handle overwhelming student loans take a look at options the possibility of refinancing or the repayment plan that is based on income.
Mortgages
Likely the biggest financial decision you'll ever make, a mortgage is the path to homeownership.
Guideline: Know before shopping and limit your mortgage loan up to 36% of annual income.
Make a move: downsizing and/or moving into a lower-cost area could make housing costs more manageable.
Car loans
For many, a car is vital to daily life.
Guideline: Keep total auto costs, including your car loan payment, . The loan term should be four years or less, and usually with 20% down.
Take action: or trading in an unaffordable car will help you control costs for your car.
Track your debt the easy method
Sign up with NerdWallet to see your current debt breakdown and future payments all in one place.
What is bad credit?
Expensive debts that drag down your financial standing are classified as bad debt. For instance, debts with high or variable interest rates particularly when they are employed for discretionary expenditures or for things that decrease in value.
Sometimes, bad debts are just good debts gone awry. For instance, credit card debt can be an illustration for this. For instance, if you've got an expensive credit card and pay it off each month, it's fine. However, if your high-interest credit card debt accumulates, you could be in danger.
High-interest credit cards
The high interest rates, such as those greater than 20%, can increase the cost of your debts.
Guideline: If you're not making progress on paying off your debts with credit cards, regardless of making sure you pay it all monthly, that may be an indication that you're dealing with issues .
Make a plan If you're able to keep your spending under control, try out the , where you settle your most smaller debts first. A can reduce your credit card debt less expensive, though you'll need good credit to be eligible for. Otherwise, a from an agency that offers credit counseling for non-profits may be an alternative.
Personal loans to fund discretionary purchases
Taking on debt for expenses like a trip or brand new clothes could be an costly habit.
Guideline: Personal loans can be a good option when you have a particular purpose in mind, such as .
Take action If you're faced with an expensive personal loan, you may be in a position to .
Payday loans
are a bad debt that can turn toxic: They typically have interest rates as high as 300% that can make them immediately unaffordable. These are short-term, small-amount loans meant to be repaid through your next paycheck.
Guideline: Financial experts caution against payday loans since borrowers could easily be entangled in a debt cycle.
Take action: Consider options such as taking out a loan from an institution like a credit union, or asking family members for help.
About the author: Sean Pyles is the executive producer and host for NerdWallet's Smart Money podcast. His writing has been featured on The New York Times, USA Today and elsewhere.
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