Updated: February 21, 2014
I have friends who are really debt-averse.
Sadly, I can’t blame them for being that for most have personally experienced, or have seen someone close to them, struggle through the difficulties of being in deep financial debt – the worries, headaches, sleepless nights and much more.
But on the other hand, I’m fortunate to know a handful of people who have become so financially savvy that debt to them has become tool they leverage regularly to make money.
So what is it about debt that makes most people afraid of it?
I’ll answer that question after sharing with you this guest post by Sophie who tells us below her own thoughts about good debt and bad debt.
Let’s first hear what she has to say.
Most of us have a common perception that debt is always a bad thing that should be avoided.
We have heard from our forefathers that there cannot be anything so great like a “free lunch”.
However, that is only a utopia because despite all this ancient wisdom, we see how debt settlement companies are popping up every day, specially in the US. And sadly, those who are reckless at their spending behavior have found themselves with no other option but to seek help from these companies.
However, as an argument, does it mean that if we do not require and never take out a loan, then it is a sign of prosperity for us?
My answer is NO – for not all debts are bad debts.
In fact, giant civilizations have been built up on debts. Big businesses cannot flourish without debt. Many nations are actually known to borrow money from the World Bank for many government enterprises, that’s what we call the national debt.
And when it comes to personal debt, it is the same.
However, it is really important that the distinction between good debt and bad debt are clarified and understood well. When we do, we can begin to use debt not because we have shortage of cash but because we can leverage it to seize opportunities.
Now, what is “good debt” and what is “bad debt”?
On the surface, having credit card debts that has been transferred to a collection agency for non-payment is considered as “bad debt” already.
Being in this situation means you have already brought sufficient damage to your debt status, your credit report will be affected negatively and your credit score goes down. In the US, when your credit score is below 600 points, it becomes harder for you to get further credit.
Alternatively, “good debt” is when you simply pay your accounts such as your bills on or before the due date.
In America many things depends on credit scores, from qualifying a home loan to getting a job in a company. Your credit score sways a great influence on every aspect of our life. Even marriage and divorce may be decided on it. That’s why it’s important to always have “good debt” status.
Thus, considering both positive and negative ramifications of debt, we can conclude by saying that proper financial planning is required when you plan to take out a loan.
Having no clear understanding of how much loan you could afford will only worsen your situation. So, always keep your credit scores up and make it a good habit to pay your credit card bills on time before your debt goes out of your control.
This guest post is written by Sophie Kinsella. She has completed her Graduation in Finance and is currently working with an investment company located in California. She has written some great articles on topics like bankruptcy, investment opportunities and more.
So why are some people so afraid of debt?
Personally, I think it’s because they lack self-confidence in their financial habits. Like many things that help a person become an achiever, it all starts with the proper mindset.
Train yourself to become smarter about money by regularly tracking your expenses, following a budget and being frugal. And I know that in no time, you begin to see debt not as a financial problem, but as a leveraging tool for wealth.
Start today by reading the REAL difference between good debt, bad debt and ugly debt here.
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