The term ‘debt’ is never a welcome one as it is virtually always associated with money. In terms of your finances though, not all debt is considered to be bad debt and in some cases debt can even be a positive thing. In simple terms debt can be classified as either:

• Long term which would include such things as your mortgage,
• Short term which encompasses such things as personal loans, credit cards and store cards.

One form of debt is good to have while the other is bad and it doesn’t take a genius to work out which is which.

Good Debt

Your mortgage can be classed as a good debt. This is because the debt is linked to an asset – your home – and that has the potential to increase in value. When the value of your property increases at a faster rate than the cost of your mortgage then you are technically making money by having the mortgage debt in place… although you don’t see the profit until you sell. This is especially true with buy-to-let properties that generate a rental income which is bigger than the mortgage payment each month. As well as having a growing equity in the property you also have a monthly income, however small, and this is all possible because of the mortgage debt.

Bad Debt

In contrast to this, there are plenty of examples of bad debt and the majority of people can admit to having run up one type or another during their adult life. Credit cards and personal loans are the most common forms of bad debt although plenty of people are talked into signing up for store cards as well. These types of debt are short term debt and they rarely have valuable assets associated with them. The majority of the money is used to buy items that depreciate in value or things that have very little value if resold e.g. cars, clothes, furniture and other household items.

Credit cards, personal loans and especially store cards are known for their high rates of interest which are added onto the amount you owe each month. This means that you end up paying the ticket price of the items you bought plus the interest that your debt provider asks for, and this can never be a good thing. Although this type of debt is classed as short term, the high interest rates mean that it can take years to pay off a reasonably sized balance and at the end of the day you pay hundreds of pounds more for your purchases for no reason.

Bad debt should be avoided at all costs however if it is absolutely necessary then you need to look around for the best deals. This could be an interest free credit card or a personal loan with a lower than average interest rate – either way you should then try to pay it off as soon as possible to save you money in the long run.