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3:35 pm - Monday September 26, 2016

The Difference Between Good And Bad Debt

| Managing Debt | Rating: 4.5
by Numan

Most Americans have some debt. We can’t pay cash for our homes or our children’s education. That’s not so bad. What’s bad is that many of us let debt get out of hand.

Under the best circumstances, your total monthly debt payments should not go beyond 36 percent of your gross monthly income. This includes mortgage and credit cards.

It’s really very easy to go beyond our means. This is especially true if you pay by using a credit card. The average U.S. household spends about $10,700 balance in credit card debts. Personal bankruptcies are at all-time highs.

But you should not avoid debt at any cost. If your cash reserves are being depleted, you may have to go into debt. The real test is deciding which debt is good and which is bad.

Good debt includes things you truly need but can’t afford to pay up in cash because your reserves will be wiped out. When borrowing is good, make sure you can afford the monthly payments.

Bad debt includes things you don’t need and can’t afford, like vacations to Jamaica. The worst is credit-card debt, because it has the highest interest rates.

If interest rates are low, compare the interest on a loan versus what your could earn from an investment. If you can get a higher return from your investment than what you pay in interest, then borrowing a small amount at a low rate is good.

 

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