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It would be easy to assume that all debt is bad debt. After all, 'being in the red' inspires panic, while 'being in the black' doesn't. Most of us who are over 21 have some form of loan or credit agreement, but what separates us is how we manage that agreement.
Lenders tell us we can use loans for cars, holidays, gifts, and home repairs and that their loan products offer us fast, hassle-free, cash. However, loans and credit cards are products and when we take out a loan or credit card we effectively 'buy' money.
As children, we might have found the prospect of 'buying money' ridiculous. When you were a child if a friend had said to you, "I'll buy your 75 pence for £1", it would have likely been responded to with giggles and suspicion. However, every day thousands of us clever grownups take out loans that work under the same principle.
People who are in 'good debt' have debts, but they're also in the black. That is to say, they have money in the bank and do not use their debts to live. Instead, they use them for simple purchases and pay their lenders routinely so that on a regular basis they may have no outstanding debt.
Another example of 'good debt' might be someone who takes out a loan, has no other debt, and knows the date they will have paid it back. Often, those in 'good debt' can afford to clear their balance whenever they like, but they use loans or credit cards to build a good credit rating for whenever they need to take out an important loan or get a mortgage.
One debt expert calls people who are good at managing money 'financially literate' because they're able to regard money differently to others and can control their spending more effectively. A common theory is that we learn how to manage money at a very early age. Some of us receive pocket money and learn to save it for toys or treats, teaching us to save and budget throughout our adult lives. Meanwhile those of us, who get money more sporadically as children and don't know where the next lot will come from, may blow it all on that toy or game and not learn to manage it as effectively.
Most people who get into bad debt find that money is tight and they see a new credit card or loan as a way to fix the problem quickly. For the 'good debt' types this isn't always the first port of call, someone with a good debt mind set might look at other ways of making money first, such as renting out a room, working over time, getting another job or spending less on certain items.
Those in bad debt often live on credit rather than a healthy bank balance and are unable to see an end in sight. They won't likely have a plan to get out of debt or it will be a disorganised and slow process. If you want to switch from 'bad' debt to 'good' debt the most important thing is learning to manage your money differently. Why not make a monthly budget today that factor in debt repayments?
