Monday,
December 27, 2021
Top Story
A Beginners Guide to Good and Bad Debt
As anyone who has ever watched their bank account balance decline after paying bills knows, owing money is no fun. But debt often serves an important function in people’s lives, putting things that can cost tens of thousands of dollars or more—a college degree, a starter home—within reach.
Such cases aren’t quite the same as racking up a high credit card balance on restaurant meals and shopping trips, underscoring that when it comes to owing money, there can be good debt and bad debt.
Good debt is seen as money owed on expenditures that can build an individual’s finances over time, such as taking out a loan for school in order to increase one’s earning potential, or a mortgage on a house that is expected to appreciate in value.
Bad debt is money owed for expenses that pose no long-term value to a person’s financial standing, or that may even decrease in value by the time the loan is paid off. This can include credit card debt and car loans.
While owing money may not feel great, debt can serve some helpful functions. For starters, your credit score is used by lenders to determine eligibility and risk level when it comes to borrowing money.
Your credit score is based on your history of taking on and paying off debt, and helps to inform a lender about how risky a loan may be to issue. Your credit score can play an important role in determining not only whether a credit card or loan application will be approved but also how much interest will be charged.
With no credit history at all, it may be harder for a lender to assess a loan application. Meanwhile, a solid track record of paying off good debt on time can help inspire confidence.
While there are no guarantees, good debt can also mean short-term pain for long-term gain. That’s because if paid back responsibly, good debt can be an investment in one’s future financial well-being, with the results ultimately outweighing the cost of borrowing.
Conversely, with bad debt, the costs of borrowing add up and may surpass the value of a loan.
Staying on Top of Debt
Both good debt and bad debt can be stressful—and both types of debt can be more costly than they need to be if you don’t stay on top of what you owe and pay back loans efficiently. A digital tracker could be the remedy.
SoFi Relay gives you the information you need to manage debt, providing real-time financial insights and tracking so you can stay on top of what you owe. Connect your accounts.
Deep Dives from SoFi Learn
Three Ways to Help Pay Off Debt Faster Ready to start knocking down those debts? Read on for strategies that can help you get out of the debt faster. Read more >> How to Prepare for When Federal Student Loan Relief Ends Federal student loan relief is slated to end on May 1, 2022. While more relief is possible, borrowers can make a plan now for future payments. Read more >> What Are the Common Uses for Personal Loans? If you need cash today but you don't have enough built up in savings to cover the purchase, a personal loan might make sense for you. Read more >>Financial Planner Tip of the Day
“A diverse mix of credit products can have a positive impact on a person’s credit. Opening at least one credit card is a good step for most borrowers. There are a wide variety of cards aimed at people with different interests, spending habits, and credit history. Although a mix of credit helps a person’s standing as a borrower, it’s not a good idea to open a line of credit that’s not needed just to have a mix of credit types.”
Brian Walsh, CFP® at SoFi