Not all debt is bad. In fact, there’s debt that can be good for you and help you build wealth. But while good debt can help you build your credit, bad debt does exactly the opposite.
Here are some kinds of debt that can be good for you.
1. Mortgage loan
Taking out a mortgage is one of the best debt decisions you might ever make. Mortgage loans come with low interest rates and potential tax advantages. Plus they’re a great way to improve your credit score and build wealth. A mortgage is good debt because it either gets you a place to live or a place to rent out as a source of income. Either way, it’s something that will grow in value as the years go by.
Monthly mortgage payments are often lower than the amount you would pay in rent too. You can use the money you save, even if it it’s only a small amount, to invest and build wealth even faster.
2. Business loan
Another type of debt that can be good for you is a business loan. Whether you’re using the loan to start or grow your business, positive use of credit can be a smart investment. For the debt to be good, however, you need a well-developed business plan so that the loan actually helps to increase profits.
Business loans are especially good because they’re geared towards growing the value of something. It’s a debt that should, over time, lead to more income.
3. Student loan
Student loans have a bad reputation, but they are an investment in your future. If you cannot afford to pay for your university education on your own, you will need to take out a loan. Just like with business loans, a student loan can contribute to an increase in career opportunities and earning power. According to the gov.uk website, university graduates earn £10,000 more per year than people who don’t have a university degree.
In addition, student loans have a low interest rate when compared to other forms of debt. As long as the payments are affordable and you don’t default, this is one type of debt that can pay off.
4. Credit-building loan
A loan that helps to build your credit rating can also be good for you. For example, credit card debt is usually considered bad because of its high interest rate. But if you pay off the card balance in full at the end of each month, you’ll build your credit rating and never pay interest. You can also look into getting a car loan to build credit. Just shop around for a low interest rate and don’t buy a car you can’t afford.
If you recently went through a bankruptcy or are trying to build your credit rating for the first time, this type of loan can help. Without a good credit score, you are considered a bad risk, and obtaining a business loan or a mortgage might not be possible. You’ll have to start with smaller debt and getting a credit card or a small car loan could be a good way to do it.
Whether you have good or bad debt, remember that the key to managing it properly is to focus on paying it off. Even the best debt can be bad for you if you default and end up with added fees or the involvement of a debt collector.