Good Debt vs. Bad Debt

Not all debt is bad. Some kinds of debt can actually be good. So, how do you tell the difference? 

Bad debt is created when you buy something that goes down in value quickly or has no potential to increase in value. Credit cards are a source of bad debt. When you pay only the minimum on your credit card, you’re charged interest and the item you purchased continues to lose value as the amount you paid for it continues to increase.

On the other hand, good debt is debt that builds wealth over the long run, such as a mortgage. Home values have increased cumulatively over the past 30 years. Business loans and sums borrowed to buy investments such as commercial real estate, are also examples of good debt. In short, bad debt is debt that’s used to buy things that will lose value and good debt is debt that’s used to buy assets that grow in value over time.

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