Good debt is defined by three factors:
- The money is used to purchase something that is a necessary part of your life.
- Repaying the debt does not blow up your budget. You can afford the monthly payments.
- You have a plan to repay the money in a reasonable amount of time.
Bad debt is the opposite and may be marked by any of these qualities:
- Whatever you purchased with credit cards or borrowed money – car, clothing – depreciates in value.
- You didn’t really need the item. Very typical of credit card purchases.
- You can’t afford the repayment plan. This impacts a lot of consumers, but especially inexperienced ones who don’t factor in the cost of borrowing money.