Understanding good debt

For many people, incurring good debt such as a loan or line of credit is the way to pay for necessities like a home or a college degree. This is different than accruing unnecessary debt, like high-interest loans to buy things that will depreciate in value.Certain types of good debt, when handled responsibly, can be a strong investment in your future.

Student loan borrowing

In today’s world, a college education has become synonymous with having a successful career. The prevailing theory is that the more education you obtain, the more likely you’ll be to land a good-paying job. As a result, incurring student loan debt for a college degree may be a great self-investment.

When paying for college, look for grants and scholarships, including LGFCU’s college scholarship, to help reduce the amount you may need to borrow. Even then, it’s best to borrow only what you need even if you’re offered more. 

Above all — on this and any loan or line of credit — remember to pay at least the minimum amount due each month. Pay more than the minimum when your budget allows. Defaulting on a student loan negatively affects your credit rating, making it harder for you to get loans or any type of credit in the future. It is a surefire way to turn what would have been good credit into bad.

Mortgage loans

As a rule of thumb, your home is one of the biggest purchases you’ll make in your lifetime. And the value of your home should be expected to increase over time. Barring unforeseen circumstances, the expectation is that you purchase a home, live in it for several years and then sell it for a profit later. If you’ve found your forever home, focus on paying off that loan and becoming free of one of your biggest sources of debt.

Do your research before buying a house. Make sure the price of the house you’re buying makes sense for the local real estate market, the house is in sound condition, and fits the needs of your family and your budget.

Pay that mortgage on time! Otherwise, you risk losing your home and your good credit rating.

Small business loans

Those who have the entrepreneurial spirit may take out a small business loan from a financial institution to get their business up and running or to expand an existing business.

As a business owner, your aim is to create and maintain a profitable, self-sustaining entity. A strategic influx of capital can help you achieve that goal, and in turn, earn back what you’ve spent, and repay the outstanding debt you accrued along the way.

Be sure to do your research on why you’re taking on debt. Look at similar businesses’ successes and failures and plan accordingly. The U.S. Small Business Administration has information on loans and programs that may help with some of that research.

Other forms of good debt

A car loan can be both good and bad debt. It’s considered bad debt because you’re paying interest on a product whose value will depreciate over time. But if you use a car for your business or need it to get to and from work, or to get your job done, that tilts the scales toward “good debt” status.

If it will improve your financial well-being to have a car and you need a loan to buy it, you can consider that good debt. If the cost of the car (and thus the repayment of the loan) is beyond your means, or the interest rate is too high, that tilts the scales back toward bad debt.

What is bad debt?

Debt becomes bad when you’re unable to repay it. You can also rack up bad debt on items which don’t provide a healthy return on your investment, or if the debt negatively impacts your credit score. So, be sure your debt load isn’t too high.

How LGFCU can help

Contact your local branch to meet with a financial counselor who can help you determine how much debt, if any, makes sense to reach your financial goals. We can even help you with a plan to get out of debt.