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Do you know the difference between good debt bad debt?

Unfortunately, I only learned there was a difference between good and bad debt when I had clocked up R 130,000 (about $10,000) on 3 credit cards and was using one credit card to pay another each month.

For months, (or was it years?) I lived like this, not managing to pay down my debt. It was time to get educated and OUT OF DEBT.  I read helpful posts by experts like this one on debt consolidation,  bad credit loans Tampa.

Another day older and deeper in debt? Sound familiar? I discovered some debt is good, and some is bad and it's important to know the difference. #thedifferencebetweengooddebtbaddebtSo… What is considered Bad Debt?

Here are a few examples of Bad Debt:

  • Credit Cards and Store Cards
  • Taking out a Personal loan to go on a holiday or keep up with the Joneses
  • Payday loans or a Cash Advance on your salary

Why is this kind of debt considered bad?

Here are 3 things that characterise bad debt.

1. It’s Costly

Bad debt is very expensive. Interest rates can be astronomical.  And the worse part is, the more desperate you are and the deeper in debt, the more expensive your debt becomes.

2. It’s Addictive

It’s way too easy to swipe a credit card and it’s just as easy to fall into a debt-cycle with payday loans and personal loans from loan sharks.  Bad debt usually offers a quick fix.

Of course, bad debt is not intrinsically bad. 

Credit Cards, used wisely, (paid up every month), can be extremely useful – and even save you money.

It’s the over-use and misuse of credit that causes our downfall.

3. Downward Spiral

Most bad debt is driven by consumerism and impulse buys. This creates a negative, downward spiral.

You get hooked on how it feels to shop until you drop and then the high costs keep you captive. We buy so much stuff, toys, clothes, shoes, make-up, only to part with it a few months down the line.

What is Considered Good Debt?

Here are a few examples of Good Debt:

  • Home Loans
  • Car Loans
  • Student Loans
  • Business Loans

So what’s the Difference?

Why are these considered Good Debt?

There are 3 main characteristics of good debt.

1. Low Cost

Interest rates are usually much lower.

2. Long Term

And repayments can be made over a much longer period of time.

3. Increases your income or net worth

Good debt either buys you assets or turns you into an asset (education).

The reality is, most of us would never have the chance of owning a house or car or getting a University education if it we weren’t able to borrow huge sums of money from the Bank.

My Top Tip:   Replace Bad Debt with Good

So how did I get out of all that credit card debt?

I took wise counsel from my boyfriend at the time. He’s now my husband.

Daniel’s advice was to pay off my credit cards and cut them up. Forever.

But he didn’t stop there.  He also offered me a way out and it saved me from financial ruin.

Daniel used his Home Loan to pay off all my credit card debt and personal loans (oh, did I forget to mention the other R 150k in personal loans).  This lowered my interest rates massively.

We set up a repayment plan and I paid him back monthly. Sloooowly. It was like our own home-spun version of debt consolidation and it set me free.

What an amazing feeling to see my debts decreasing, instead of increasing or maxed out month-on-month.

I’ve never applied for a credit card again.  Lesson learned.

Have you had any hard lessons in personal finance?  Are you a rehabilitated credit card user?  Or are you still stuck in that negative downward spiral?