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Is there a difference between good debt and bad debt?

Many people used to believe that there was a difference in the quality of debt an individual could take on that determined if the loan was worth the risk and the payments. For example, a mortgage was the only way most people could realize the dream of homeownership, and the subsequent increase in value of the home made a loan of this type a “good debt.” However, the same investments that seemed to be worth borrowing for up until 2008 have some looking questionable now as values plunge and the need for debt relief becomes greater.

An industry expert makes several suggestions for those who are thinking of taking on debt. First, ask yourself if the debt is going to finance something long-term. In other words, is the debt going to give you something that lasts, such as a college education or a home, or is it simply to finance the purchase of something you want, such as a vacation or clothing? Next, consider the amount you can repay, using reasonable estimates. Buying a house makes no sense if you cannot make the mortgage payments. Finally, never allow your unsecured debt to exceed an amount you can pay in full in one or two months. If you cannot pay your credit card balances month-to-month, you are overusing them.

Making these distinctions between “good” and “bad” credit use may be difficult for those who have developed poor spending habits, but, with practice, they can also lead to a much wiser use of your hard-earned money.

A bankruptcy attorney can discuss options with debtors to determine the best way to handle financial problems. Bankruptcy is one option for those who have already run up unmanageable debt, and can give you a fresh start and allow you to put new spending rules into place in your life.

Source: NJ Today, “Have The ‘Good Debt’ Vs. ‘Bad Debt’ Rules Changed?” Jason Alderman, Oct. 22, 2012

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