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Learn the Difference Between Good Debt and Bad Debt

Some forms of debt are expensive, money sucking pitfalls. Others are a good tool to help your financial life. Learn the difference.

Moving from High school into college probably means all of the sudden you are getting bombarded with credit card applications. Not only that, but once you hit the age of 18 you are legally allowed to take out a loan in most states. Whether you wish to purchase a t-shirt, camcorder, car or even a house you probably can do so using debt. Is this a smart idea? In some cases no and in some cases yes. First you must learn the difference between good debt and bad debt.

Good debt

As a student you are creating a life as an adult. One of the most important parts of planning is preparing your financial record.

Credit cards are a very useful tool to build your credit score - the number lenders use to judge your credit worthiness- but only if you use them wisely. Not all cards are created equally.

College cards are a good option, but they are usually limited in ability. They usually have low account balances and not the best terms. But your main reason for getting a college credit card is to build your credit score. Just be very careful.

Retail store cards are among the worst cards. They lure in customers by offering 10 percent or 20 percent off your current purchase, but the interest rate is often very high and the service less than exceptional. According to personal finance website Bankrate.com, any savings that you made when you applied for the card will easily be wiped out if you fail to make your payments on time.

Other forms of good credit is anything that builds your wealth over time. Bankrate cites the example of mortgages. Homeowners have a vastly higher net worth than renters. The value created from homeownership is huge.

Bad Debt

Bad credit is anything that destroys wealth over time. Think pay-day loans, high interest credit cards or stock margin accounts that aren't paying off.

One other form of debt that destroys wealth: auto loans. Bankrate says auto loans are a rotten but often necessary deal for borrowers. Once you drive off the lot the value of your newly purchased asset has just dropped a huge percent, but you are still stuck with the regular payments.

Stay away from debt that will destroy wealth.


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