How to Avoid Turning Good Debt into Bad Debt

How to Avoid Turning Good Debt into Bad Debt

There are some kinds of debts that are better than others; in fact, if you want to build good credit history, you need to have some kind of good debt and be a prompt payer of these debts. In general, good debt is defined as those that pay off in the long run, like investments. So when you borrow money to buy a house, finance your education or start a business, you expect to make more money using the money you’ve borrowed. These then become good debts which add value to your life and also provide a way to boost your credit score if you pay the due amount diligently and regularly.

However, some people end up messing up their good debt and converting it into bad debt because of their ignorance or sheer irresponsibility. Bad debt makes you spend more than you make; it hinders your ability to repay your debt; and it destroys any credibility you’ve built in your credit history by way of good debt. If you want to avoid turning your good debt into bad ones, here’s what you must do:

• Never tie up your credit card debt into your home mortgage: Most people pay lower interest on their home mortgages than on their credit card debt. So they don’t mind taking out a second mortgage to pay off their credit card debt because they now owe the same amount of money, but there is only one debtor and the interest rate is much lower. However, this strategy works only if you’re able to keep pace with the payments on your mortgage every month; even a single omission to pay could put you in danger of foreclosure and losing the roof over your head. So use this only as a last resort, after you try to settle your credit card debt or ask your lender for an extension or a lower interest rate.
• Pay your student loan on time: When you avoid or miss making payments on your student loan, you not only mess up your credit history, you’re also in danger of never qualifying for any federal education loan ever again. Also, if you earn a regular income and file your taxes, the IRS holds back your tax refunds as payment towards your loan. This becomes a problem when you do start making payments again – it’s very tough to get the IRS to stop making these deductions and the process is long and complicated. So make things easier on yourself by never defaulting on your student loans.
• Be wise when it comes to a second home: A second home is a good investment if you use it as a vacation home – you can claim tax deductions on the mortgage interest, on property tax, and on other expenses you make towards the house. However, if you’re renting this property out for more than 14 days of the year, you must pay tax on the rent you collect, and any deductions you claim cannot be more than the income you make off the property. So get your calculations right, and save yourself the hassle of good debt becoming bad debt.

This guest post is contributed by Omar Adams, he writes on the topic of online accounting degrees . He welcomes your comments at his email id: omaradams47@gmail.com.