Every Financial Debt Is Different. You Will Need To Be Aware Of And Distinguish The Three Types Of Financial Debt
Lots of people dream of getting out of debt. Perhaps you are one of them. The beauty and independence of being debt-free, of not owing anything to anyone is a very attractive prospect, one that deserves serious thought and action.
All debt is not the same. There are some kinds that are terrible to have; others are not so bad. So which is which?
It is useful to sort money owed into one of three categories: consumption debt, use debt and investment debt.
Consumption Debt is debt acquired to spend, use up, with no residual value. An example would be money you borrow to take a vacation. You borrow the money, spend it on the vacation and afterwards there is nothing of hard cash value left. Oh, you will likely have some great memories and good feelings, but absolutely nothing that you could cash in
The majority of credit card debt is consumption debt. Most credit card debt is bad. It's the most expensive and most demanding kind of debt to have, with high interest rates and charges and also strict repayment rules. If you are late on a payment the terms can change and tighten up on you.
Consumption debt is the worst type of debt to have. It is to be avoided, and if you already have it, you ought to be paying off credit card debt first.
Use Debt is debt that you get with buying something to use, like a car, a truck, a boat or an airplane, for example. Use debt is typically guaranteed by something of value but that is depreciating every month. It isn't good, but is sometimes necessary to give you something you need to work or to transport yourself to work. It's bad, but not all that bad.
Investment Debt is debt you acquire in buying or getting assets that will produce income or savings later on. Examples are college loans to help you get a college degree or advanced degree, a house loan that enables you to acquire a home, build equity instead of paying rent. Investment debt puts money-making or saving assets that you can utilize under your control.
Investment debt, to obtain real money-making assets can be almost a good thing. Better than doing without and not being able to generate the income or save the cash that the assets acquired can provide.
When you are paying off debt, you should pay off credit card debt first. Investment debts should be the last to be paid.
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