We can all agree debt is a problem but there is difference between taking on bad debt and good debt.
Since 2013, there has been a $1 trillion increase in the amount of debt Americans are carrying according to a Federal Reserve Report.
Today, that breaks down to nearly $1.2 trillion in auto loans; nearly $1.6 trillion student loans; and $1 trillion in consumer credit mostly from credit cards.
Consumer debt is growing in America and there doesn't seem to be a solution. But not all debt is bad.
Debt like a mortgage or education loan allows you to purchase an asset that retains value can be considered good debt. While debt that is used to purchase things that hold no value is is considered bad debt.
In the long run, you want to be debt free, whether it's good or bad debt but here is a breakdown on the difference types of debt.
Good Debt
Good debt is debt that holds a future payoff to you. Creating debt for a mortgage can be considered good debt if the interest rates are low and real estate values rise over time. College tuition holds a future payoff as statistics show that college graduates earn more money than high school graduates.
According the U.S. Census, adults 18 and older with a bachelor's degree earned an average of $67,300 in 2016, compared to $36,700 for those with a high school diploma. Those with advanced degrees took home an average of $95,200 a year.
Bad Debt
Bad debt would be considered high interest rate credit cards and retail cards. The store credit cards can be the worst. We have all been tempted by store clerks to open those “instant” credit cards to save 10% off a purchase. It’s not worth it.
Store credit cards offer some of the HIGHEST interest rates. If you have any bad debt, pay it off as soon as possible. Start to pay your highest interest rate credit cards off first.
You want to get rid of those immediately. Never, if possible, pay the minimum due on your high interest rate credit cards. It will only cover the interest owed and almost never attack the principal balance. See Eliminate Debt to find out how paying the minimum will keep you in debt.
Continue getting rid of bad debt by paying off one high interest rate credit card after another while paying the minimum on your other credit cards.
In the meantime, take steps to reduce household expenses such as grocery shopping and transportation costs. Reduce discretionary expenses such as entertainment, Starbucks coffee and eating out.