The word “debt” is almost always viewed in a negative way. So when someone asks if being debt free is a good thing, you might be wondering what rock they’ve been living under. In our nation, it’s nearly impossible to get anywhere without acquiring some sort of debt, and although it may be inevitable, it might actually be more beneficial than you think. Those who are lucky enough to be debt-free shouldn’t automatically be thought of as the smart ones because in fact, its not always the best thing for your financial situation.
When it comes to debt and credit there are two sides to every story. Essentially, good debt is any investment that increases your net worth and creates value for you. This includes things like a mortgage, school loans or business loans that will (hopefully) increase over time. Bad debt on the other hand is any amount of debt acquired by buying things that are disposable or depreciate in value. This usually means purchasing items like clothes and vacations by putting them on your credit card.
After understanding the difference between good and bad debt you may be able to better comprehend how acquiring debt can actually be a good thing. The focus of this idea centers around your credit, including your credit history and credit score. If you never build up any good debt, this can lead to a low credit score or your credit score going down. Your credit is important for the credit bureaus, bank and loan officers to understand how well you manage your money and financial responsibility. Also, if you don’t have any money in investment debts, that money will simply be sitting in an account rather than making it work for you and increase your value and net worth.
Credit can be good when you are diligent about paying off loan balances in full and on time each month. Doing this will allow you to be able to purchase big ticket items when necessary while showing your financial responsibility by paying off the debt regularly. Efficiently paying your loan amounts will help you build up your credit score to a beneficial point that will allow you to get better loans later on. Your credit history will be a testament to the fact that you are financially savvy and manage your money well which tells banks and loan officers that you are responsible. If you ever want to get a loan from a bank you will need to have a good credit score and positive credit history. This means that without debt, you will not be able to prove you are worthy of a good loan.