Not all forms of debt are the same. Just like there’s good cholesterol and bad cholesterol, there’s “good debt” and there’s “bad debt”. While you certainly don’t want too much of either type of debt, minimizing your “bad debt” is the best place to start if you’re trying to repair your credit.
So what exactly is the difference between “good” and “bad” debt? Examples of good debt would be a home mortgage loan, or student loans for your college education expenses. Good debt is generally considered to be any investment that will grow in value. If you buy a house now, it’s likely to be worth more than you paid for it 15 or 30 years down the road. Likewise, student loans used for a college education can increase your value as an employee and result in higher earning power in the years to come.
Bad debt, on the other hand, is used to purchase things that quickly lose their value, or debt that carries a very high interest rate. Examples of bad debt are credit cards, payday loans, or cash advance loans.
Unfortunately, many people can relate to this type of “bad” debt. According to a 2016 study of American household credit card debt by the website Nerdwallet, the average household with credit card debt had balances totaling $16,425. And households that carried credit card debt averaged $1,300 in annual interest, according to the study.
Reducing or eliminating bad debt isn’t easy, but it can be done. Doing so requires discipline, patience, and a willingness to face the harsh reality of your financial situation. There are several ways to take on this challenge and come out on the winning side.
So where should you start? A good place is the National Foundation for Credit Counseling® (NFCC®). Founded in 1951, NFCC describes itself as the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial and counseling services.
NFCC’s website is loaded with information regarding debt counseling tips and services ranging from credit/debt counseling to debt management plans. You can connect with an NFCC Certified Credit Counselor by calling 800-388-2227. Or you can find an NFCC member agency by using their online directory.
To access the NFCC’s website, go to https://www.nfcc.org/
Here’s some additional advice to help you tackle your debt situation:
- Figure out your total amount of debt. Experts agree that knowing what you owe is one of the first steps you should take.
- Find out how much money is coming in. This includes paychecks, benefits, or other sources of income.
- Track your bills and income with a monthly calendar. And be specific. When do you get paid and what is the exact amount minus taxes and benefits? When are bills due and how much is each one?
- Once you have established a budget, use it. It doesn’t do any good to just know what your income and expenses are. You also need to discipline yourself to stay within your budget. In other words, don’t overspend.
- Use cash instead of credit cards to pay for things. This makes you more aware of what things really cost because you’re actually handing over “real” money instead of plastic to make purchases. Research has shown that people are more likely to make impulse purchases when using credit cards, especially when it comes to luxury items, because they feel like they’re using “play” money.
- Consider a credit card balance transfer or requesting a lower annual interest rate on your current card(s). Many credit card companies offer promotions of 0% interest for a year or more if you transfer your debt from an old card and pay a small fee. The other option is to contact the issuer of your current card and ask for a reduction in your annual interest rate. A recent study found that two-thirds of people who asked for a lower rate received it.
Once you’ve got your bad debt under control, or eliminated it altogether, you’ll feel a major burden lifted off your shoulders.