Good Debt V.S. Bad Debt

bad debt and credit history

As interest rates continue to rise, the question arises as to whether you are carrying too much personal debt.

Veda Advantage’s biannual Australian Debt Study revealed one in five Australians with debt were finding it difficult to make repayments or were unsure how they would make their next repayment.

Another report found more than 40% of Australians spent about half their monthly income repaying debts.

Everything is relative. If you are earning $50,000 and spending 50 per cent of your income on interest repayments, then it can be argued you are vulnerable to rate increases and/or defaulting on your loan(s). But if you earn $200,000, it can be quite a different story.

While some Australians may be at breaking point in the face of rising interest rates, there are many more that have a cushion to cope with such eventualities. Either they allowed for a 2% rise in interest rates (if they took out a loan recently) or they continued to make larger repayments during the global financial crisis as variable interest rates dropped to their lowest level in 50 years, creating a cushion in the process.

We all know credit card debt can be a hard debt to stay on top of. Credit card debt is about the worst bad debt you can have when you consider that some providers are charging more than 20% interest.

It’s also important to note that not all debt is bad debt. Bad debt is considered to be debt that you’re paying interest on, or debt incurred to purchase a depreciating asset, such as a car loan or a loan taken out for a holiday. A good debt is when you borrow to make money through investment, such as an investment property or other tax deductible options.

The Difference Between Good Debt and Bad Debt

Good Debt
Good debt is considered to be an investment debt that creates value; such as real-estate debt, home loan debt, business loans and even student loans.

Buying a home or refinancing to get rid of excessively high interest rates is considered good debt, as is generating debt to buy high-return stocks, bonds and other investments.

Bad Debt

The term bad debt is referred to when discussing the purchase of disposable items or durable goods using high interest credit cards and loans when you cannot afford to pay the balance in full at the end of each month.

If you are faced with more good or bad debt than you can handle, then consolidate your debt. Debt consolidation is the process of taking two or more loans and combining them into a single loan (a ‘debt consolidation loan’) that can help you to save money by reducing the amount of interest you pay, reduce your repayment periods and improve personal cash-flow.

Debt consolidation also makes your life a little easier by giving you one easy-to-manage repayment. Beyond using a debt consolidation loan to pay off your credit cards, personal loans and home loan, debt consolidation provides you with greater financial freedom as it saves you time and money.

Regardless of whether you have good debt or bad debt, if you would like a debt consolidation loan then contact the Australian Lending Centre on 1300 138 188 to learn about your options for debt consolidation.


Get In Touch With Us Now!

Share this post!