If you have no debt, you are either lucky or do live in a jungle. Debt is something that is unavoidable these days and because we are living in a world where material goods are sometimes valued over knowledge or personal values, we are all trying to match the expectation by taking on credit and getting into debt.
There is although a huge difference between good debt and bad debt. Simply said: good debt is something you will benefit from long term, and bad debt is what you will lose out on. Let me just explain this theory with a two common examples.
Mortgages
If you have taken on a mortgage to save money as it does actually cost you less to pay it than renting somewhere it is a good debt. If you are using the money that is left over each month to improve your hose and increase the value, it is becoming even better. This way you will build equity and wealth and in the end of the day by increasing the value of your property help you pay off the debt early.
However if you took on a mortgage at an introductory rate and knew that the rate might go up later, still stretched your budget to the end, you are going to get into bad debt in no time. If the interest rate increases and your repayments go up, you have no additional funds to pay the difference therefore you have a bad debt. This bad debt can cost you loads of money and can lead to bankruptcy.
Credit cards
If you are just planning to refurbish your house and took on a zero percent credit card as you know there is a 50% off offer on everything in your favorite DIY store, it can become a good debt. Only if you know that you are getting a bonus or a lump sum money within the interest free period when you will pay the whole balance back. You will be able to save money on your home improvements, increase the value of your home and not pay any interest.
But if you just saw the latest 42” 3D TV in store and have the urge to buy one, even though you know that you cannot afford it, and you buy it on a credit card because it is on a deal, you will be more likely to end up with bad debt. It is because you cannot repay the card balance in a reasonable time, so will incur interest every month that will make your purchase loads more expensive. Therefore instead of saving money you are actually losing out and pay much more for the TV than you would if you waited till you had enough money to buy it for cash.
Conclusion:
Bad debt or good debt does not initially exist. The way we make financial decisions determines if our credit ends up working for us or against us. In a way we are creating bad debt or good debt ourselves.