On Good Debt, Bad Debt and Ugly Debt

You probably heard of it before, the concept of good debt versus bad debt. If not, then I’m excited to tell you about it today.

Moreover, did you know that there’s also such a thing as ugly debt? I first encountered this term a few days ago and I’m also sharing my thoughts on this one.

But first, let’s talk about the root word of all these terms, DEBT.

What is debt? How does it become good or bad (or ugly)?

Can a person live without debt?

In a nutshell, debt is something that you owe. In Filipino, debt is simply utang. If you have debt, then you are called a debtor and the individual or institution that lent you money (or goods) is called the creditor.

So how does debt become good or bad? Perhaps this video I found in YouTube could explain it better.

Did you enjoy that short clip about good debt versus bad debt? I did. Let’s summarize the important things we learned about debt so far:

Good Debt
Debt that is incurred to acquire something that creates or has the potential to create value. It is basically anything that makes you money, makes you smarter or reduces your debt. Examples are school loans and business loans.

Bad Debt
Debt that is incurred to acquire something that decreases in value over time. Simply put, it’s something that makes you lose money. A common example is an unnecessary credit card expense that you don’t pay off immediately.

So what’s ugly debt? Here’s the second part of the video:

Ugly Debt
Debt that comes with high interests. An example is a payday loan. In the Philippines, they come from loan sharks, informal financiers and your friendly neighborhood “5-6″. Of course, if you use the loan from these sources to earn a profit that’s higher than their interest rates, then it immediately becomes good debt, but that’s a rare case.

So instead of acquiring ugly debt. You should instead find other sources of money as advised in the video. Some of which are:

• Ask you employer for a cash advance.
• Get a loan from a credit union.
• Borrow money from your family or friends. Make sure to pay them back.
• Find ways to make money such as selling stuff online or joining direct selling companies. Just check out my articles on income opportunities.

Can you live without debt?
Yes you can, but it will take you a long time to become rich. My personal advise, acquire and leverage good debts, minimize or eliminate bad debts and avoid ugly debts.

For more articles about money, debt and personal finance, please subscribe to Ready To Be Rich.

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This entry was posted by Fitz Villafuerte on Monday, November 10th, 2008 at 8:59 pm and is filed under Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. If it's your first time to comment here, they will be held for moderation. Off-topic responses may be deleted.