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When it comes to debt there are good debts and bad debts. Good debts are those debts that help enrich your life and financial portfolio such a mortgage. A home is an asset than can only increase in value and as a result your debt is an investment too. However bad debts are those debts that do not help enrich your portfolio, instead they accumulate interest and demand money from you long after the worth of the purchased item has faded – these are the worst types of debt and we will list a few examples below.
- Store credit is one of the biggest bad debts available. Consumers are often lured into these debts by special offers promising discounts and free items upon opening an account; however these accounts have incredibly high interest rates and short repayment terms. This means that event though a consumer may enjoy the occasional 20% off or bonus voucher, they are paying for through high payments. It is better to set aside money for items such a clothing or electronics, or to use an annual bonus instead. Do not end up paying more than the item is worth due to store credit.
- Credit cards are another bad debt. Although they are useful in an emergency or when it comes to booking online, they should not be treated as an extension of a consumer’s income. Any money spent on the credit card should be replaced immediately to avoid interest. Do not accept offers to increase the available credit on a card and leave the credit card at home to avoid incurring a bad debt on a whim.
- Short term and pay-day loans are some of the worst debt a consumer can incur. These types of loans have incredibly high interest rates, whilst at the same time demanding repayment in unreasonably short periods of time. Consumers may see these debts as a quick fix to a financial pickle, but in fact they can do more damage than good by starting a debt cycle based on dependence.
In short consumers are advised to avoid bad debts, stick to good debts and if they find themselves over-indebted seek out the help of a debt counselling professional before it is too late.
Article written by: Andrea van Tonder 06-2013