Lots of people dream of getting out of debt. Maybe you are one of them. The attractiveness and independence of becoming debt-free, of not owing anything to any one is a very attractive prospect, one that deserves really serious consideration and action.
All financial debt is not the same. There are some varieties that are terrible to have; others may not be so bad. So which is which?
It is useful to sort debts into one of 3 groups: consumption debt, use debt and investment debt.
Consumption Debt is financial debt acquired to spend, use up, without any residual value. An example could be money you borrow to take a vacation. You borrow the amount of money, expend it for the vacation and afterwards there's nothing of hard cash value left. Oh, you will possibly have some great memories and good feelings, but nothing which you could convert into cash
Nearly all consumer credit card debt is consumption debt. The majority of credit card debt is bad. It is actually the most expensive and most demanding type of debt to have, with high rates of interest and fees and also rigid repayment rules. Should you be late on a payment the terms could change and tighten up on you.
Consumption debt would be the worst type of form of debt to have. It is to be definitely avoided, and if you already have it, you should be paying off credit card debt first.
Use Debt is financial debt that you will get with buying some thing to use, like a car, a truck, a boat or a plane, for example. Use debt is typically secured by something of value but that could be depreciating every year. It is not good, but may be necessary to give you a thing you need to work or to transport yourself to work. It is bad, although not all that bad.
Investment Debt will be financial debt you acquire in purchasing or getting assets that will generate revenue or cost savings later on. Good examples can be college loans to help you get yourself a college degree or advanced degree, a home mortgage loan which enables you to purchase a home, build equity instead of paying rent. Investment debt places money-making or saving assets that you can use within your own control.
Investment debt, to buy actual money-making assets can be almost a good thing. Far better than doing without and not being able to generate the income or save the money that the assets obtained can offer.
When you are paying off debt, you should pay off credit card debt first. Investment debts could be the last to be paid.
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