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Manage Debt
The Different Types of Debt |
In order to get an accurate
picture of your debt and deal with it effectively, you need to look at more than just the
amount of debt you have. You should understand the different types of debt that exist and
then categorize them according to your financial situation.
Types of Debt
There are two different categories of debt you can accumulate:
1. Personal Debt
Personal debt, often called "bad debt", results from the purchase of an
asset that will likely depreciate in value over time. This includes borrowing for such
items as a new car, clothes, or furniture. Going into debt to finance a vacation or go out
to eat is one of the worst offenders of personal debt. Bad debt offers short-term pleasure
in place of long-term anguish. It really is as simple as that.
Note: With personal debt, it's important to note why
you have it in the first place and to what degree it's necessary. Financing a car because
it gets you to work or school may be an acceptable form of personal debt. Purchasing a new
car on a whim is not. Each situation should be weighed differently.
2. Investment Debt
Investment debt, often called "good debt", results from the purchase of
an asset that will likely appreciate in value over time. This includes borrowing for an
education, the purchase of a new home, or even starting a new business. The tax deduction
alone on mortgage interest makes investment debt one of the more acceptable types of
debt.
3. Debt Payments
When it comes to making debt payments, some debts are more essential than others. The
following list will help you determine which of your debts require top priority for
payment if you're in financial straits:
Essential (must pay)
- Mortgage payments
- Car payments
- School loans
- Secured loan payments
- Income Taxes
- Medical bills
- Utility bills
- Health Insurance
Nonessential
(desirable to pay)
- Credit cards
- Subscriptions
- Personal loans
- Unsecured loan payments
- Charge cards
- Membership dues
Your financial situation
must not be plagued with high personal debt. What determines that is your ability to
understand the different types of debt and priorities of debt payments. They are important
factors in determining your success.
Credit and Debt Calculators:
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• Should I pay off debt or
invest in savings?
• What will it take to pay off my balance?
• Should I consolidate my
debts?
• How Much Am I Spending? |
