Not all debt is created equal. There is a big difference between good debt and bad debt. Once good debt turns bad it could have dire consequences on your lifestyle.
There is an easy way to ensure your debt stays in the good books and that is by understanding the difference between good debt and bad and identifying the warning signs to avoid bad debt.
Most people don’t realize their good debt has gone bad until it is too late. However if you can understand and acknowledge the warning signs, you might just be able to avoid bad debt.
Not all debt starts out as bad debt, in fact going into debt is a necessity for some things like buying a house or a car. Borrowing money for purchases like this can be seen as a wise investment so this is considered good debt.
Good debt is debt that is easily manageable and affordable for your means. So your repayments must be easily affordable and you must have a back-up in place to be able to repay your debt should anything happen, such as injury, illness or job loss.
When debt is no longer manageable it turns into bad debt.
Bad debt is debt that has spiraled out of control. It could have started out as a good debt, such as your mortgage, which is now unaffordable due to a hike in interest rates, or it could have started out as a bad debt.
Purchasing things on a credit card without a plan to repay what you borrow is considered a bad debt.
Raking up a $2000 holiday on a credit card only to pay the minimum repayment for the next 6-7 years is a bad financial move to make.
Unaffordable debt can have an impact on every aspect of your life and cause stress and anxiety.
To avoid bad debt, you simply need to plan ahead.
How to avoid bad debt
Bad debt is a debt which hasn’t been managed properly. You have either borrowed more than your means, haven’t planned your repayments correctly or failed to have a back-up plan if things go wrong. Before you borrow money here are a few things you can do to avoid bad debt.
- Get used to it. Before you borrow money, you should get in the habit of setting aside your predicted repayments and learning to live without it. If you are planning to buy a house or a car, use a loan calculator to figure out how much your repayments would be, then start putting that amount into a savings account. Not only will this exercise help with your deposit, but it will give you a realistic idea of what making those repayments would be like. If you find you are struggling, or redrawing your savings every now and then you need to review your budget to adjust your expenses or consider saving longer and borrowing less.
- Plan to fail. You never know what turns life will take. You could fall ill, become injured, break-up with your spouse or lose your job. All of these things will have an impact on your income. Will you be able to manage your debt if your circumstances change? You should always have a savings reserve set up in case of a rainy day. If you lose your source of income you can use your savings to manage until things improve. You could also take out income protection insurance to ensure you still have money coming in while you recover.
- Don’t overcommit. If you are handling your debt, think very carefully before you take on any more. If the interest rates rise your repayments could increase by hundreds of dollars.
- Pay more than the minimum. Paying off your debt in advance saves you thousands of dollars in interest. Don’t just pay the minimum repayment, pay off as much as you can afford, especially while times are good and interest rates are low. This will help you avoid bad debt.
Warning signs of bad debt
If you are receiving threatening phone calls and letters from your creditors, your debt has turned bad.
But there are a number of tell-tale signs before you reach this stage which indicate you are heading in the wrong direction. Identifying these signs can help you avoid bad debt:
- You have no savings to speak of
- You are losing track of what your owe to who
- You can only afford to repay the minimum repayment amount
- You are looking for ways to earn more money
- You are forced to cut back on everyday expenses
- You don’t have a budget, or if you do you aren’t sticking to it
- You are stressing about money
- Pay day can’t come soon enough but there never seems to be enough
- You are hiding purchases or account statement from your spouse
If you are experiencing any of these signs you should talk to a Personal Debt Management Company about what strategies you can implement to avoid bad debt.
Eliminating bad debt
The earlier you act on your declining debt situation the easier it is to pull back into line. Not being able to manage your debt is not something to be ashamed of, in fact, money management is something we have to learn on our own and usually that means we learn from our mistakes.
As soon as you feel as though you are losing control of your debt situation, call the professionals at Debt Rescue and ask for help. There are a range of positive debt solutions out there for people at every stage of debt from budgeting help to debt consolidation, debt refinancing, Debtstroyer Agreements and Debt Agreements.
To avoid bad debt call Debt Rescue today and Talk to An Aussie Who Cares.