Good vs. Bad Debt

If you have been following my posts for a while, you probably know that I talk a lot about reducing and eliminating debt. So it might come as a shock to you that I do not think all debts are created equal and there is a such thing as good debt! I actually break debt down into four different categories ranging from terrible to good.

  1. Terrible Debt: This debt is the worst type of debt you can have. This debt includes payday loans and pawn shop loans. These loans typically have a VERY high interest rate. When I say very high, I mean that I once saw one that was 640% interest! I think we can agree that is terrible.
  2. Bad Debt: This debt may not be terrible but it is still pretty bad. This includes your credit card debt, unsecured signature loans, car loans, etc. Yes you read that correctly, car debt is not considered good debt. The average new car drops in value $100 per week during the first four years.
  3. Better Debt: I only classify one type of debt as better debt and that is home mortgage debt. Every time you make a payment some of this money is going into home equity so hopefully when you go to sell it, it will have gone up in value and you will have made money.
  4. Best Debt: If you are going to have debt, business debt is the best debt you can have. This is where I would categorize rental properties, buying franchises, buying into a small business, etc. This type of debt will allow you to scale your business and make more money.

All debts are not created equal and there are some that are way, way worse than others. Make sure you take this into consideration any time you are contemplating going into debt so that you can make the right financial decision.

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Understanding Credit Scores

Credit scores are a measure of one’s ability to manage debt. The dominant credit scoring system which is used by most lenders was created by Fair Isaac. This system provides a measure of an individual’s credit worthiness and is commonly known as a FICO Score.

A credit score impacts many things. It determines whether or not you can obtain a loan. If you qualify for a loan, the credit score dictates the interest rate charged.

Credit scores also impact insurability. When you obtain auto, renters or homeowners insurance, the credit score directly impacts the insurance cost. The lower your credit score, the higher the insurance premium will cost. I have seen insurance premiums doubled because of poor credit.

Credit scores also impact the ability to obtain a cell phone contract or an apartment lease. It can affect utility connections. Utility providers usually require much larger deposits from people who have low credit scores. If you have an excellent credit score, a deposit might be waived entirely.   Credit scores can even impact your ability to obtain a job. Your credit score will have an impact on your life.

Many people know their exact credit score. If it is great, they wear it as a badge of honor of their financial prowess. “My credit score is 814,” they will say quite proudly.

Others who have a more colorful experience with credit, will wear it as a badge of dishonor. “My credit score is in the toilet,” they say with a glum look.

The fact is that credit scores are only a measure of how well a person can manage debt and contractual financial agreements.

Credit scores are calculated using these data points:

  1. Type of credit issued [Revolving debt (credit card) or Installment debt (anything with payments and a pay-off – car loan, boat loan, student loan, etc.]
  2. Age of the credit relationship
  3. Amount of credit one can obtain (total of all credit limits)
  4. Amount of credit one has consumed (percentage of total credit limit)
  5. Payment timeliness
  6. Requests for credit (“hard pulls” of credit)
  7. Outstanding judgments

Look at the list again. Does it include any relationship to how much money one might have in a savings account? Or any connection to a person’s net worth?

Here’s the fact: You could be a millionaire and have a terrible credit score.

How? By having zero credit relationships.

While a great credit score is more desirable than a terrible credit score, it is not the best indicator of financial success. Choose instead to make financial decisions about what best increases financial margin and net worth!

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MMT PODCAST: Is All Debt Bad?

Welcome to this week’s edition of the Monday Money Tip Podcast! This week, my co-host, Megan Hibbard and I are discussing debt and if there is a such thing as good debt. We also have some interesting statistics for you from the Motley Fool in regards to the average American and their finances and a success story from a woman who now has a net worth of $1,000,000. Make sure you tune in to get your tip today!

It’s our goal at the end of each episode that you gain hope and encouragement in your financial journey, you’re equipped to take a next step, and that you’ve had FUN with us!

Find the Monday Money Tip Podcast HERE. Please let us know what you think by leaving us a rating!

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Email info@iwbnin.com to ask questions or share success stories.

Show Notes

About the Episode:

  • Joe answers the question, “I have debt but is there a such thing as good debt or is all debt bad?”
  • Joe shares some interesting statistics from the Motley Fool.
  • Hear a success story about a woman who started using our tactics 8 years ago and now has a net worth of $1,000,000.
  • Joe shares a tool that can be useful for you in your financial journey.

Resources:
Motley Fool Article
Credit Sesame
Credit Karma

Quote of the Day: “Build financial margin up during PEAK times so it can help cover you during WEAK times.” -Joe Sangl

 

Actual Cost of Debt Calculator

Do you know what your debt is really costing you? How much of your monthly payments to your debt is actually going to principal and working at attacking your debt? Use our Actual Cost of Debt tool today to find out! By entering in the name of the debt, the amount you owe, the monthly payment and annual interest rate, the tool will calculate the amount of interest you are paying per month and per year. It also shows the overall percentage of your payments that are being applied to your principal balance and your debt freedom date.  

Take some time to calculate what your debt is costing you in interest payments. If you are carrying a balance on credit cards from month to month, consider using a 0% balance transfer HERE. This can allow you to start applying 100% of your payments to debt and accelerate your debt freedom date.

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0% Balance Transfer Credit Cards

Do you carry a balance on your credit card from month to month? If so, you are likely paying hundreds, if not thousands, of dollars in interest year after year. You should consider transferring your balance to a 0% Balance Transfer Credit Card.

Most people want to pay off their outstanding balance but feel stuck due to the interest rate that is applied to the credit cards each month. 0% balance transfer credit card offers provide a way to eliminate a credit card debt very quickly and can provide HUGE savings over keeping a balance on a high interest card.

Here is how it works:

Suppose you transfer a balance of $5,000 from a card that has a 21.99% interest rate. You apply for a 0% balance transfer credit card. This offer comes with a 3% balance transfer fee, but it also provides 0% for 18 months.

Upon acceptance of your application, the 3% balance transfer fee ($150) will be applied to your balance on the new credit account making your total balance owed equal $5,150 ($5,000 balance that was transferred PLUS the $150 balance transfer fee).

Now comes the good part! You now owe 0% interest for the 18 month period – as long as you make all of your payments on time, of course. By taking 15 minutes to do a little research and apply for a 0% interest card, you can eliminate hundreds or thousands of dollars in interest and accelerate your debt freedom date.

We keep a running list of these credit cards HERE on the I Was Broke. Now I’m Not. website.

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