How to Get Out of Debt - Understanding Good and Bad Debt

When it comes to getting out of debt and enjoying financial freedom, many individuals mistakenly lump all of their debt into a single pile. Once a person finds themselves living under the shadow of a mountain of debt, it is easy to look at everything purchased or paid for with credit as being somehow tainted. The truth is that not all debt is bad just as not all debt is good. It is important to keep perspective when dealing with that in order to determine how an individual is going to manage their finances in the future.

It is simply not possible for a person to completely live without debt or credit for their entire life. At some point, an individual is going to need to borrow money to pay for necessities, a roof over their head or an education. Rather than looking at it as a necessary evil, credit should be viewed more as a tool that can help an individual achieve great things or seriously hurt themselves if it is not used properly. Debt can be instrumental in helping a person build wealth just as it can be one of the primary factors that lead to a person's financial downfall.

Some examples of good debt include an individual's mortgage, a school loan, a business loan or a real estate loan. These types of debt help a person establish themselves and they provide real value. For instance, a mortgage not only allows a person to put a roof over their head, it also can be one of the most important investments that a person ever makes. Owning a home is one of the keys to prosperity in this country. Likewise, a school loan makes it possible for a person to earn a better wage and enjoy a more comfortable life.

Bad credit, on the other hand, includes things like auto loans, credit cards, and credit obtained from department stores. This type of credit offers no real value to the individual. An auto loan, for example, can be used to purchase a car but the vehicle will begin to depreciate as soon as the loan documents have been signed. This means that a person, although they must borrow money in order to afford the car, begins losing money as soon as the loan takes effect. Credit cards and store credit fall under the same category because the interest rates generally mean that a person pays more than what the item actually cost.