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Whether your debt is good or bad depends on the type of financial obligation, the reason you owe it, and whether you can afford to repay it. When used the right way, debt can help you manage your finances more effectively, leverage your wealth, buy things you need, and handle emergencies. But if you're not careful, a bottom line steeped in unpaid bills can wreak havoc on your overall financial picture and destroy your dreams.
Debt can be a positive force in your life when it helps you
- Build your family's net worth — the difference between the current value of your assets and the amount you owe. A mortgage is a perfect example, because you expect the value of the asset you finance to increase over time.
- Buy something that will save your family money for years to come. For example, you get a loan so you can weatherize your home and lower your utility bills.
- Purchase something important or essential to your life that you could never afford to buy if you had to pay for it with cash — such as a car or a home.
- Invest in yourself in order to increase your earnings potential. For example, you borrow money to return to college or to upgrade your skills so you can make more money in your current field of work or move into a more lucrative career.
Pay for an unexpected emergency when you don't have the cash to cover it. For example, your car breaks down far from home and you need to have it towed; or you have no health insurance and your child needs expensive medicine.
However, loading up on bills can be a negative force in your life when you
- Spend money you don't have in hand to buy nonessential goods or services that do not increase your wealth and have no lasting value. Consider restaurant meals, groceries, clothing, personal items, and vacations. The longer you take to repay those bills — often owed to credit card companies — and the higher the interest rate, the worse the debt.
 | Credit card debt is not bad if you pay it in full as soon as you receive your statement, or if you pay in full within a very few months and you don't charge more on the card until you've paid off the outstanding balance on your account. |
- Secure the debt with your home or with another asset you don't want to lose when you're not sure that you can afford to repay the obligation.
- Have a high interest rate and make low monthly payments. By the time you pay off the bill, the amount you pay in interest exceeds the value of the product or service you financed.
- Borrow money from dangerous lenders like advance fee lenders, payday lenders, and finance companies.
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