Most people carry some type of debt at some point during their lives, whether it be good debt or bad debt. At Share the Wealth, it is our goal to educate you in financial literacy, including the concepts of debts.
One type of debt, bad debt, can financially ruin a person, reducing your net worth and any cash flow you may have.
- Although some people believe otherwise, your residential mortgage is a bad debt. You are not receiving cash flow from your home, rather it is costing you money each month. At worst, your home can even be a depreciating asset, in seen in the recent real estate market correction in 2008.
- Pay day loans have the potential to be the most dangerous type of bad debt. A payday loan company advances you money from your next paycheque a week or two early, then charges you a rate of interest that can sometimes total more than 400% per year, on top of the principal repayment each time. Often the borrower has little choice but to take another loan out as they would otherwise have no money to live on if they don’t, until the next paycheque, and the cycle continues.
- The most common type of bad debt is credit card debt. If you know you will be carrying credit card debt, it is important to know your options. Research different credit cards with different banks and find the lowest annual interest rate. If you have found yourself stuck in credit card debt, get in touch with your credit card company and request that you get a lower interest rate or you will transfer the balance to a competitor. They will usually comply.
On the contrary, good debt makes you money in the form of tax deductions, cash flow, equity or a combination of these benefits. Good debt is most often borrowed at a low interest rate that allows you to grow your wealth while it provides ‘passive income’ (income you don’t have to work for). Join us back here on Thursday to learn the benefits of good debt.
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