The Different Kinds of Debt and Debt-Relief Options

Debt takes on a very negative connotation in today’s financial parlance. Words like “subprime,” “credit crunch” and “recession” assail viewers every time they turn on the broadcast news. Recently, the Federal Reserve cut interest rates to help an economy struggling with debt. But not all debt is bad. This article highlights differences between good and bad debt, along with offering several debt-relief options for those in financial trouble.

Good Debt

Good debt is secured with a valuable asset, like a home mortgage or, perhaps, a car loan, and can be considered an investment. Home loans are good because over time a home’s value increases. Student loans are also considered good debt because they are also like an investment. Students who graduate with a college degree earn, on average, higher incomes than those that don’t.

Home loans and college loans are good for another reason: they usually have very agreeable terms. Both types of loans come with very low interest rates, and borrowers repay the debt over a long period. The typical home loan, for instance, carries a 30-year term. The interest on college loans is so affordable that the graduate can repay their loans slowly over a long period as they gradually earn more money and build their personal wealth.

Therefore, good debt helps borrowers by increasing their wealth and by building a healthy credit history.

Bad Debt

Bad debt is any debt that either has unfavorable terms like some credit cards or is blatantly wasteful and expensive. Some credit cards have favorable terms and, if consumers are diligent and pay their entire balance every month, they too can help build a good credit score. But credit card debt becomes bad debt when the consumer carries a balance for an extended period, abuses the card, misses payments or pays late. This will negatively affect credit scores and make it much more difficult to acquire good debt in the future.

Other examples of bad debt are payday loans and pawnshop loans. These debts carry ludicrous terms, with interest rates often two or three times as high as credit cards. These debts are bad because they don’t offer the consumer long-term financial help. These bad debts are a quick financial fix and should be avoided at all costs.

Debt Relief Options

Help is available for the consumer tangled in bad debt. It is not easy to recover from a desperate financial situation, but it can be done with some discipline, patience and hard work.
Debt consolidation is a useful option for consumers with large low-interest debts, like home mortgages. By moving their high-interest credit card debt into a home mortgage, consumers save a bundle on interest payments. The only caveat to this method is that consumers should be wary of borrowing too much against their home’s value, which will extend their loan and make it more difficult to pay back.

Debt settlement is a great option for consumers who have high-interest credit card debt. This involves working with your creditors to cancel a portion of your credit card debt. Unfortunately, debt settlement is only available to consumers who are having a difficult time paying their minimum payments every month. Generally, consumers with less than several thousand dollars in debt will not qualify for debt settlement.

Author Bio: Drew Johnson is an expert in the various methods of debt reduction and has successfully reduced his own debt. Read additional articles by Drew on Debt Management, Credit Management and more.