The Difference Between Good Debt and Toxic Debt
Is there any such thing as good debt?
We’re all nervous when we have it, and we’re in good company: the total U.S. consumer debt is at $14.9 trillion. That includes mortgages, auto loans, credit cards and student loans.
Student loan debt is especially prevalent, with students holding a projected $1.5 trillion in federal student loan debt.
So should we cut up our credit cards and avoid debt like it’s the plague?
Not so fast.
All forms of debt are certainly not created equal, and an important step in becoming financially literate is better understanding the differences between good debt and toxic debt. Understanding this distinction is an important part of building the right kind of credit and setting yourself up in a strong position to build wealth and financial independence.
What is Toxic Debt?
It’s important that we define what exactly we mean by debt in order to de-stigmatize the debt crisis in America.
Yes, about 1/3 of Americans struggle with debt.
But there are varying levels; above all, it’s critical to avoid toxic debt.
- Credit card debt; It’s estimated that about 10% of 18-29 year olds are at least 90 days overdue on their credit card bills. Clearing this debt away is almost always the goal they should focus on taking care of first, even before paying off student loans or saving for retirement.
- Needless consumption; Credit card debt is often invariably fueled by the act of consumption and purchasing assets that are only depreciating in value. Think of spending tens of thousands of dollars you don’t have on a flashy car to impress your Instagram followers – a purchase that is only dropping in value the moment you drive it off the lot..
Countless Americans destroy their long-term prospects for creating wealth by borrowing money from tomorrow to meet today’s wants.
Unfortunately, an entire industry has emerged of predatory loans with eye-popping interest rates and details buried in lengthy contracts – all designed to confuse and take advantage of consumers.