| March 13, 2012

What’s the difference between ‘good’ debt and ‘bad’ debt?

When Americans hear the word “debt,” most of them think of high-rate credit card balances, student and auto loans, mortgages and similar lines of credit. So it may come as a surprise to hear financial professionals differentiate between these types of balances, and refer to some as “good” and other debts “bad.” Many industry experts agree that carrying some types of balances can benefit adults while others weigh them down. So when it comes to determining which debts are helpful and which are harmful, drawing a line can be difficult.

The answer is not as clear-cut as it may seem. Credit card debt, for example, is typically thrown into the bad debt category, but it’s important to make a few clarifications before swearing off these accounts. Credit cards, if managed wisely, can be a positive way for individuals to build a solid credit profile, according to CNN Money. Individuals who want to purchase a home, buy a car or finance a big project will need a healthy credit standing to obtain a loan, and credit cards are typically the first place new credit seekers turn to build a credit score. However, carrying more credit card debt than can be paid off each billing cycle can prove harmful.

In addition, opening multiple credit accounts within a short period of time and making late payments can also tear down a consumer’s credit score. These scenarios are what typically result in credit cards being labeled “bad debt,” but individuals who avoid these circumstances, live within their means, and do not rely on credit cards may improve their credit standing.

CNN Money experts define “good” credit as those types which help individuals get ahead. For example, a mortgage is generally considered a good type of credit because it allows homeowners to build equity and boost their asset holdings. But like credit cards, a mortgage can turn into “bad” debt if homeowners mismanage their loan. For example, taking on a bigger mortgage than they can handle or missing payments can quickly put them in a financial bind.

Various types of debt can be helpful to adults if they know how to manage them and only take on what they can afford to pay. But when these accounts start weighing down on borrowers, it’s crucial that individuals get to the root of the problem and get their finances back on track. Housing or financial counseling and working with a professional may help adults find the resolutions they need to get a handle on their debt.

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