Every headline you read about personal finance right now says to get out of debt. With the economy crashing, the last thing you want to carry with you is debt, right? Well, yes and no – you do want to get rid of any credit card debt, for sure. But what about your mortgage, car, or student loan debt? Is it that important to get rid of all of that right now as well?
There really are different categories of debt, and they can be simplified for this post into just two – good debt and bad debt. “Good” debt is kind of a misnomer, as any debt you carry is still money you owe to someone else. But there is a big difference between good and bad debt, and the one you need to be focusing on right now is “bad” debt. This is the kind of debt you want to try to get rid of quickly, as generally the interest rates are higher, the payment schedules are shorter, and the issuer of the bad debt could adjust the interest rate at any time. Sound familiar? Yep, we are talking about credit cards. This is the bad debt that you should be working on full time to try to get rid of. It’s one thing to have to worry about making the mortgage or the car payment; these are things essential to your day to day life. But worrying about making a minimum credit card payment for items you purchased years ago can be a real drain on the finances, especially as people are losing jobs and the money in their retirement accounts. This is why it is so important to not carry around credit card debt; you just don’t know when things will get rough. I remember when I had a minimum payment of $400 a month on my debt – that was so incredibly painful to shell out every month. Oh what I could have been doing with that $400 a month! The longer you wait to pay off your bad debt, the higher it will get and the more interest you will pay – not a good recipe for success. So even if you only have an extra $5 a month to pay on your credit card debt, please do so. For more help on getting out of credit card debt, check out my series “The Getting Out Of Credit Card Debt Challenge“.
The other kind of debt, the “good” kind, is a little easier to deal with. This is normally the kind of debt we take on to better ourselves and our situation – college loans, mortgages, business start up loans, etc.. These generally have much lower interest rates that are set in stone, and their repayment schedule is spread out a little further. Chances are that the companies will not ring you up one day to change your rate – you know what you are getting ahead of time and you can set up your payments to match. Houses normally appreciate in value over the long run, so we don’t mind taking on a mortgage payment to hopefully get that growth. Student loans can enable you to get higher paying and/or more rewarding jobs, so borrowing money for them is not seen as a bad thing. And starting a business can be a step towards financial freedom, so I don’t see a problem with taking out loans from the SBA. This is all what the experts call “good” debt in that it can be very helpful, whereas “bad” debt could be debt you have been carrying from buying too much stereo equipment back in college (like yours truly). Good debt needs to be repaid per the schedule, but you don’t need to try to kill yourself to get it paid off, especially in this economy.
Focus on the bad debt and think about how much easier your monthly bills would be to make if you didn’t have to make credit card payments all the time! Once you get rid of this debt, the only debt you have left will be the kind that hopefully will be helping your financial situation and not hindering it. Not all debt is created equal, and when you only have a set amount of money each month to work on paying it off, be sure to concentrate on the bad stuff. The other debt can wait; the important part is to rid yourself of that credit card debt. Think it cannot be done? Check out what Paid Twice has been doing to her debt load in the last year or so; when you put all your efforts into paying it off, it most certainly can be done!
If you have been working on paying off your bad debt, what kind of success have you had? What advice could you give to other people working towards the same goal? Let us know in the comments!