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Understanding Debt

Debt can be a tricky topic. Most discussions that involve debt revolve around the principle that you should keep your debt as low as possible.

A good rule of the thumb is to keep your debt to income ratio at no more than 36%.1 But, there are moments in life when debt is unavoidable and ultimately an investment. However, if we understand the right time to incur debt, and how to effectively manage it, we will be better off in the long run.

What is bad debt?

In its simplest form, bad debt is when you borrow money to purchase something that will not increase in value or provide a return on investment. This type of debt usually holds much higher interest rates, which can cost more if not paid off over time. Also, incurring too much bad debt can ultimately hurt your credit report over time.  An example of bad debt is credit card debt. Credit cards can be very useful when used strategically. You can gain points and get rewards, and they help to build your credit history. Due to their high interest rates and add-on late fees it is important to be smart with credit cards and always make your payments on time.  For more helpful tips on how to effectively manage credit cards visit our Credit Tips section.

Consumer loans are another product that could lead to excess debt if not used properly. These loans can be very helpful in some instances, such as paying for updates to your home or paying off medical bills. Consumers need to be smart about these loans and make all payments on time. As a best practice to avoid incurring too much bad debt, try not use debt to finance your life and to live within your means by creating budget.

What is good debt?

Good debt is money you are borrowing that will eventually appreciate in value or increase your net worth. This type of debt is considered an investment. For example, when you take out loans for school you are investing in your education to get a good job and overall increasing your income over your lifetime. When you take out a mortgage you are doing so to build equity and hope your home will increase in value.

To help navigate the waters of debt and money management visit our Money Management section at amerisbank.com.


The information voiced in this material is for general information and is not intended to provide specific advice or recommendations for any individual.

1. https://www.credit.org/2011/04/07/debt-to-income-ratio/