Right now, Americans have over a trillion dollars in credit card debt. That’s the highest level ever seen in U.S. history!
Although not all credit card debt is a bad thing, some of it definitely falls under the category of bad debt loans. Do you know how to tell the difference between good debt and bad debt?
If you don’t, no worries – you’re not alone. We’ve put together this guide to help you avoid bad debt loans and make better decisions about your finances. We’ll even show you how you can use good debt to get ahead.
Ready to learn how to get your finances on track this year? Keep reading!
What Are Good Debt Loans
As mentioned above, not all debt is bad. However, it’s important to be able to recognize the difference between good and bad debt.
Good debt functions as an investment in your future. Did you take on debt to buy something with value that will go up (such as a house)? Or is it something that will help your financial situation, like a car that will allow you to commute to a better job?
These are examples of good debt. Student loans are another type of good debt. Your education is an investment in your future that will likely pay off in the long run.
What Are Bad Debt Loans?
Bad debt, on the other hand, doesn’t pay off in the future.
Bad debt loans are generally used for things that won’t last. This is why a lot of credit card debt is known as bad debt – because it’s often used for spur-of-the-moment purchases that will bring no financial gain.
Bad debt includes using credit to buy clothes, food, or entertainment. When you do use your credit card for things like these, it’s important to pay off the balance in full right away so you don’t rack up bad debt.
Using credit to travel is also an example of bad debt – unless that travel will pay off in the future, such as traveling for an important job interview. Vacations can be fun, but they’re not worth going into bad debt for when there is no clear future payoff.
6 Ways to Change Your Financial Future
If you already have some bad debt, that’s okay – you have a lot of company. The good news is that when you change your financial habits, you can start getting rid of bad debt and set yourself up to take on good debt.
Let’s take a look at a few surefire ways to avoid bad debt loans and change your financial future.
1. Don’t Ignore Your Bills
It’s never worth missing a payment to buy something for fun instead.
When you miss a payment on your credit card, car insurance, or even utility bills, your credit score can plummet. It can be hard to come back from a financial crisis that has collections agencies on the phone. The best way to avoid it is to always make payments on time.
As much as a third of your credit score can be based on how well you keep up with paying bills, so don’t forget to factor this in. Setting up automatic payments can be a good way to ensure you stay on top of it.
2. Live Within Your Means
When you spend more than you’re earning, there’s no doubt that you’ll go into bad debt. That’s the only way you can live outside of your means.
It’s not enough to just spend what you earn, either. You need to save for the future, because you never know what could happen. If you suddenly find yourself without a job, for example, you will take on bad debt loans if you have no savings account.
3. Use Credit Strategically
When you first get a credit card, it can feel like having free money – but that’s not the case at all.
Credit cards can be your best friends or your worst nightmares. It all depends on whether or not you use them strategically.
Don’t allow credit cards to tempt you into spending outside of your budget. Instead, you can build good credit by setting up to automatically pay a small monthly bill with your credit card (such as a Netflix account).
Then, be sure you also pay off the credit balance every month – you can set up auto-pay for that with your bank.
4. Save Automatically
It’s hard to save money. Making the conscious decision to set aside funds when you’re already on a tight budget can feel painful.
That’s why you should set up your savings so they happen automatically. When a small portion of your money automatically goes to savings each month, you likely won’t even miss it.
Ten percent is usually a good rule for how much you should automatically save. It’s not so much that you’ll miss it a lot, but it’s enough to add up over time.
5. Believe in Yourself
One of the major bad financial habits people have is that they don’t trust themselves to make good choices with their money.
Do you believe you can stick to your financial goals and get your money back on track? If you don’t, it will never happen.
There are many apps out there that exist to make your financial life easier. Try s a few out and see what you learn. And, with an internet connection and a little bit of time, you’d be surprised how much you can teach yourself about finance.
6. Take Action
If you find yourself often struggling to make ends meet, or lamenting your low paycheck, it’s time to take action.
Maybe it’s time to look for another job. However, you don’t necessarily have to make such a drastic change – you can also ask your boss for a raise. If your job values you and fears losing you, they’re likely to bump up your paycheck to make sure you stay.
There are also other ways you can take action. Maybe taking on a part-time second job will help you pay off your credit card. Then, once you’re out of the bad debt hole, you can go back to working one job.
Ready to Get Rid of Bad Debt?
Getting rid of bad debt is easier than it sounds. Once you know the difference between good and bad debt, just follow the 6 easy steps above.
Need to get rid of bad credit so you can take control of your money? A personal loan is another way you can get out from under the bad debt burden – read more here.