Tuesday, May 29, 2012

What Are the Different Types of Debt?

Wipe our DebtWipe our Debt (Photo credit: Images_of_Money)
Although the term "debt" is widely used, there are generally four kinds of debt: The Good, The Bad, The Ugly, and The Worst.
Good Debt There's not a lot of "good" debt. Borrowing money for home or for school is considered good debt. Some even consider a car loan a good debt to carry. Although, quite honestly, I contend that borrowing for a home and school are the only kind of good debts to carry. A normal run-of-the-mill car should never be considered an investment since it depreciates 20% the minute you drive it off the car lot. Some financial gurus argue that carrying loans for school is not a smart financial situation. However, I think any action you can take to better your financial future is a smart move.
Bad Debt It's clear that credit cards are the fastest way to fall into debt. If you cannot afford to pay off your entire bill within a month or two, then you can't afford the items you want to buy. Too many Americans are getting themselves in way over their heads because of vacations and food and nights out and clothes that are charged away. They then spend the next few years trying to eliminate this debt. (Fact: More than a third-36%-of those who owe more than $10,000 on their credit cards have household incomes under $50,000. Wait. It gets worse: 13% who owe that much have incomes under $30,000. Source: msnmoney.com)
Ugly Debt Stay away from charge cards that are offered at department stores. These cards-across the board-have insulting interest rates. So even if the clerk offers you a 10% discount on each item you bought that day if you open a store card, continue to refuse the offer since the interest rates for the cards hover around 20%. (Wasn't worth that 10% off, was it?) Sub-prime loans and sub-prime credit cards are some really ugly debt, as well.
The Worst Debt And really stay away from payday loan offers. This is equivalent to predatory lending. We see these commercials on television and too often these check cashing and payday loan institutions set up shop in the poorest areas of town. With APR of 400% to 1000% the "services" these businesses offer are unjust and immoral, keeping those with the least financial cushion in a state of perpetual debt. It's incredibly unethical. Fortunately, many of us have known about the pitfalls of entering into an "emergency" loan with these sharks. However, there are too many people who haven't been able to avoid this predatory lending practice.

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