Knowing the difference between good debt and bad debt

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Good Debt And Bad Debt
Good Debt And Bad Debt

Knowing the difference between good debt and bad debt

Few of us will ever avoid being in any sort of debt throughout our lives, but it’s important to remember that there are such things as ‘good debt’ and ‘bad debt’.

One can seriously damage your credit rating, while the other can be used to improve your chances of getting anything from a credit card to a mortgage – but what do you need to know about each?

Good debt is generally considered to be borrowings that can help to create value. These can include products such as student loans – your aim is to gain qualifications which will allow you to command a higher salary – or a business loan (spending money to make money).

With good debt, there is always a plan in place of how the money will be repaid and what difference the service will make to your life.

Debt Out
Debt Out

An easy way to think about this is by considering what happens when you take out a mortgage on a family home – a popular form of good debt. Unless you win the lottery, you’re unlikely to be able to buy the property outright, but by purchasing a chunk and lending money to cover the rest, you can generate wealth if the property is sold for more than you bought it for.

On the other hand, bad debt refers to a situation where there is negligible gain from borrowing money to buy something. For example, if you spend hundreds or thousands of pounds on a credit card on disposable goods such as designer clothes, you need to have a plan in place of how you will pay this back.

Never mind the fact that the clothes will instantly dip dramatically in value once they’ve left the shop; without a plan in place of how you will pay back the money, you could end up in a spiral of debt that could lead you to insolvency or even bankruptcy.

Do credit cards create good or bad debt?

Credit Cards
Credit Cards

The above does not mean that credit cards entirely generate bad debt. Indeed, a credit card can create good debt if you manage your money properly.

Credit cards afford far more protection than debit cards or paying in cash, meaning they can be a safer bet for large purchases such as holidays. If a travel firm goes bust, you’re far more likely to get your money back with a credit card than a debit card.

Credit Cards
Credit Cards

If you simply pay off the credit card bill with money from your current account or savings, you’ll be able to enjoy the freedom of spending in the black while taking advantage of the spending protection afforded by a credit card – the best of both worlds.

Money tips: Should I use a store card or credit card this Christmas?

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Credit cards on dollars
Credit cards on dollars

Money tips: Should I use a store card or credit card this Christmas?

Whether we’ve been frugal or flashing the cash throughout the year, Christmas is the time many of us let go of the purse strings for a few weeks – which means a bit of smart financial advice in advance can be handy.

There are numerous options when it comes to funding a festive splurge – and many things to consider before hitting the stores for a bit of retail therapy. One of the ways that many high street shops encourage us to part with our cash is through tempting store card offers.

Tips- to save money on christmas shopping
Tips- to save money on christmas shopping

These pieces of plastic draw shoppers in with impressive introductory offers of a 10, 20 or even 30 per cent discount on the final bill. In many cases, consumers don’t go into a store with the intention of buying items on a store card – and walk out the door with one after the hard sell at the counter.

However, the interest rates can be extremely uncompetitive compared to credit cards – read the small print and you’ll realise you could be paying up to 30 per cent interest. Miss a repayment or forget about the card and that saving could be far outweighed by the interest.

That’s not to say that using store cards can’t be a savvy way to shop

Store Card
Store Card

If you’re good with money and organised, they can lead to big savings. The trick is to take advantage of the introductory discounts, pay off the balance immediately, then close the account.

Of course, at Christmas it’s easy to lose sight of what you’ve spent and where, meaning a credit card could be a better option.  Although you may not make as big a saving on purchases, if you go for a zero per cent deal, you won’t be paying large interest on your monthly bill. Keep an eye out for cashback credit cards – if you’re planning to make many purchases from the same superstore or supermarket, many products offer a flat discount on all purchases within that store.

Tips- to save money on Christmas Shopping
cTips to save money on Christmas Shopping

Once again, being disorganised is one of the biggest dangers with a credit card – as with any financial product, the key is to be realistic about what you can afford and how you plan to pay your borrowings back.

If you’re determined to stay in the black at Christmas, one of the best ways is to save throughout the year and spend only from this pot of money. Spending on a debit card may not give you impressive discounts – and in cases where the item is large, adequate financial protection – but it can be one way to ensure that you’re not pay for your festive purchases well into next summer.