Struggling with debt can prevent many people from being able to enjoy doing their favorite things or just being able to relax. When you have debt that is crushing you, it is easy to become a slave to your debt. But not all debt is considered “bad debt;” there are some debts that are deemed “good debt.” How can you focus on getting out of debt that is crippling your ability to do anything and move towards debts that are going to somehow help you?
List Your Debts
To understand where you are at with your debts, take the time to create a list of all your debts and create a debt hierarchy. Subordinated debt is anything that is a lower priority debt and is not a primary debt. Your home loan, car loan, and college loan are all considered “good debt” and should be at the top of the priority list. Other debts like credit card debt, personal loan debt, and retail cards are lower priority debts. While credit card debts do have a large impact on your overall credit rating, they are debts that you can ignore more than a larger debt like a mortgage. Creating a hierarchy list allows you to determine which debts you need to focus on paying when you have money troubles. One way to get an idea of how the debt hierarchy structure works is to view a bankruptcy filing. Some bankruptcy options will include a list of assets that are liquidated to pay for the debts that have been accumulated.
Home Purchase
One debt that is usually considered “good” is the purchase of a home. This debt is an investment in your future as it allows you to have a place to live and to build up equity in the home. Most people with debt issues will not be able to pay for the home up front, and they won’t have a large down payment offer. It is important to meet with a bank and talk about your need to buy a home and what you can afford. You do not want to become house poor. This often occurs when a person ends up buying a home that is too expensive and is unable to meet the monthly payment obligations. A mortgage payment will have a lower interest rate than other debts, making a house a great investment option.
Student Loan Debt
Similar to a home loan, a student loan is a debt that is seen as “good debt.” This is because of the way it works as an investment in your future and your ability to obtain a higher-paying job. Student loan debt can be challenging to navigate when you have a lot of debt, but the interest rates are normally much lower than they are with other types of debts. This is a great way to focus on paying down the debt faster due to the lower interest rate, or being able to pay off other debts with higher interest rates as you meet the monthly student loan debt requirements.
Other Debts
There are some other debts that can be deemed “good” in certain situations. Buying a car is often a necessary debt, but buying irresponsibly makes it a bad debt. You need to obtain a car loan that fits within your budget and will not have a high interest rate. Credit card debt with a monthly balance is a bad debt, and it’s one that often forces people into bankruptcy.
Byline
Jerry Campbell writes on Banking Law, Financial Regulation, Real Estate, Debt Restructure, Accounting and other kindred areas.
JRO
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