Understanding good debt

Debt isn’t always a negative part of life. In fact, it can be a powerful tool in your arsenal when used strategically to reach specific long-term financial goals. You may ask, what type of debt does this? The answer comes when you define “good debt” versus “bad debt”.

Let’s unpack “good debt”

Good debt is debt that serves as an investment into your future rather than simply transactional. It has the potential to increase your wealth and improve your financial standing over time.

Examples of good debt include:

1. Purchasing a primary residence with a mortgage loan helps build equity because it is a long-term investment, and therefore a good debt.
2. Making an investment in yourself with a higher education degree and a student loan will most likely unlock higher earning potential in your career – another good debt.

While good debt can give you a leg up in your financial future, bad debt can knock you down. Examples of bad debt include unnecessary credit card spending and high-interest car loans.

Key tips to managing good debt

Smart financial planning and being disciplined are key aspects to managing good debt. Here’s our recommendation to help you stay on track:

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We offer several financial options designed to see you through to the end of your debt consolidation journey. Let’s find a financial solution that both fits your individual situation and allows you to take back control of your finances.

1. Monitor your debt-to-income ratio and aim to keep your total monthly debt payments to 35% or below of your gross monthly income.
2. Strive for on-time payments. Set up autopay to help you stay on top of monthly due dates. Late payments can affect your credit score, plus they accrue unnecessary late fees.
3. Be sure to prioritize higher interest debt first if you can manage those larger monthly payments up front as this will help save you money.
4. Consider refinancing loans to save money on interest payments. Better terms may exist, and you may be missing out.
5. Focus on reaching an ideal credit utilization ratio and working to rebuild your credit rather than adding additional debt into your life.

When you have a better understanding of your debt and begin to manage it wisely, you will most assuredly improve your quality of life and have a strong financial foundation for years to come.