These days, there’s a lot of talk surrounding good debt and bad debt; but what do they actually mean? This blog explains just that, and applies to all stages of life - whether you're just starting your financial journey and trying to build your credit history, or the looming cost of living crisis is weighing you down; we’re here to explain the difference between the two - and what you can do to stay out of bad debt!
What is good debt?
The first thing to understand is that not all debt is bad. In fact, some types of debt can actually be quite helpful for your financial health! For example, taking out a mortgage to purchase a home is considered good debt because it’s an investment that will likely grow in value over time. What’s more, if you’re paying it off each month, this can improve your credit score as you prove yourself to be reliable and low-risk. Additionally, student loans are generally considered to be good debt as they (supposedly) help you invest in your future through acquiring a degree. The key here is that the debt is used to purchase something that is believed to increase in value or generate income, which can then be used to pay off the debt.
What is bad debt?
Bad debt, on the other hand, is debt that does not have a positive impact on your financial health. For example, credit card debt is considered to be bad debt because it's easy to rack up large amounts, and is most often used to purchase non-essential items. Additionally, payday loans and other high-interest loans are considered to be bad debt because they can quickly become unmanageable!
How to stay out of bad debt
The best way we can stay out of bad debt is to borrow money for things that we know we can afford. However, it is also important to make sure that we have a plan in place to pay off any debt that we do incur. If you're not sure how to create a budget or get out of debt, there are plenty of resources available online (hint, hint - check out our Instagram and other blogs!) which can aid you in gaining control of your finances.
However, as the cost of living increases, more and more people are borrowing money and increasing their debt to pay for energy bills and other essential items. If you’re in this situation make sure to check out Citizens Advice, who offer a range of information and services to help you navigate this situation, and make you aware of all the help you are entitled to.
Our app can give you tips based on your spending to save you even more money, and, of course, how to be Incredible 😎
Manage your credit with Incredible today. Incredible is available on the App Store and Google Play Store.
