Good Debt vs. Bad Debt: What Type Do You Have?

No one likes to be in debt, but debt is a necessary fact of life for most Australians. Whether you're buying a home, going to university or starting a business, loans are often the only way to access the urgent finance you need to move forward in life.

On the other hand, some types of debt can be less beneficial and has the potential to cause hardship.

Knowing the differences between good debt and bad debt can help you keep your credit reputation looking positive.

What is 'good' debt?

The idea of good debt might sound like an oxymoron, since being in debt is never truly desirable. Rather, this is debt that can create wealth in the long term – whether it's a mortgage for a property that will increase in value, an investment loan or an education loan necessary to start or advance a career.

What is 'bad' debt?

Bad debt is debt that doesn't help to create wealth, but is spent on consumer goods, services or assets that depreciate in value over time. An example of this type of debt includes credit card debt, car loans, wedding loans and holiday loans.

Why does this matter?

The type of debt you have may not only make a difference to your monthly repayments, but it can have a big impact in the future if you apply for a loan or credit card. This is because banks and other lenders can see the full details of your credit history and use this information to determine whether you are suitable for a loan and at what rate and limits.

Bad debt such as credit cards or payday loans may not be looked on favourably by lenders if it suggests that you may have trouble keeping up with loan repayments, especially if you've ever missed payments or defaulted.

Good debt such as a home loan could be viewed in a different light, as will debt from education and business loans that suggests you're taking steps to improve your financial situation. In Australia, comprehensive credit reporting lists positive information as well as negative, so lenders will see if you've kept up with your loan payments on time every month.

Even good debt can be bad

While good debt that's paid on time can be an advantage, this positive will be cancelled out if lenders can see that you've often missed payments or defaulted on a loan. A default is a missed payment that's more than 60 days overdue. It stays on your credit report for five years.

If you've taken on more debt than you can comfortably afford, even if it's for a good cause, this can also look bad as it can make you seem risky to lenders.

If you're worried about falling behind on your repayments or you need more debt advice, get in touch with Debt Fix to find out what your options are. Call us today on 1300 332 834 for a free debt assessment and no-obligation consultation.