What is the best debt to have?
Debt that helps put you in a better position may be considered "good debt." Borrowing to invest in a small business, education, or real estate is generally considered “good debt,” because you are investing the money you borrow in an asset that will improve your overall financial picture.
Examples of good debt are taking out a mortgage, buying things that save you time and money, buying essential items, investing in yourself by borrowing for more education or to consolidate debt. Each may put you in a hole initially, but you'll be better off in the long run for having borrowed the money.
A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%. This is seen as a wise target because it's the maximum debt-to-income ratio at which you're eligible for a Qualified Mortgage —a type of home loan designed to be stable and borrower-friendly.
The debt avalanche approach starts with paying off the card with the highest annual percentage rate first. Next, you pay off the card with the second-highest APR and so on.
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time.
$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt.
- Student loan debt. Student loans can be “good debt" if they help you earn a degree and launch you into a well-paying career. ...
- Home mortgage debt. ...
- Small business debt. ...
- Auto loan debt. ...
- Credit card debt. ...
- Payday loans. ...
- Borrowing to invest. ...
- Predatory/High interest loans.
The 28/36 rule dictates that you spend no more than 28 percent of your gross monthly income on housing costs and no more than 36 percent on all of your debt combined, including those housing costs.
The general rule of thumb is that you shouldn't spend more than 10 percent of your take-home income on credit card debt.
Is it better to save money or pay off debt?
You may feel more comfortable focusing on building an emergency fund before tackling debt. In situations where loans are secured at a favorable interest rates, you might prefer to save and invest in the hopes those returns will exceed the interest that accrues on your debt.
High-interest loans -- which could include payday loans or unsecured personal loans -- can be considered bad debt, as the high interest payments can be difficult for the borrower to pay back, often putting them in a worse financial situation.
While paying down high-interest debt will help you reduce the amount of interest you owe, not having an emergency fund can put you deeper in the red when you have to cover an unexpected expense. “Regardless of [your] debt amount, it's critical that you have money set aside for a rainy day,” Griffin said.
“That's because the best balance transfer and personal loan terms are reserved for people with strong credit scores. $20,000 is a lot of credit card debt and it sounds like you're having trouble making progress,” says Rossman.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
The bottom line. $15,000 can be an intimidating total when you see it on credit card statements, but you don't have to be in debt forever. If you're struggling to make your minimum payments every month and you don't see light at the end of the tunnel, sign up for a debt management program to get out of debt fast.
The bottom line: Credit card debt is considered "bad" debt because of its high interest rates and low minimum payments, and the fact that it isn't used to buy appreciating assets. Use your credit cards for the rewards and other benefits, but pay the balance in full each month.
Key Takeaways. The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
Generally speaking, cars purchased with a large down payment and with a short-term car loan are considered to be good debt. That's because large down payments usually mean lower interest rates. Further, a shorter loan term means you'll pay less in interest over the life of the loan.
It will take 47 months to pay off $20,000 with payments of $600 per month, assuming the average credit card APR of around 18%. The time it takes to repay a balance depends on how often you make payments, how big your payments are and what the interest rate charged by the lender is.
Is $2,000 credit card debt bad?
Is $2,000 too much credit card debt? $2,000 in credit card debt is manageable if you can pay more than the minimum each month. If it's hard to keep up with the payments, then you'll need to make some financial changes, such as tightening up your spending or refinancing your debt.
Age Group | Average Debt | Delinquency Rate |
---|---|---|
18-25 | $8,091 | 1.47% |
26-35 | $17,191 | 1.49% |
36-45 | $26,048 | 1.11% |
46-55 | $32,508 | 0.83% |
Millionaires typically balance both paying off debt and investing, but with a strategic approach.
- Know your credit score. This is a wise place to start. ...
- Analyze your cash flow and long-term goals. ...
- Pay off high-interest debts first. ...
- Take advantage of various debt-use strategies. ...
- Develop an effective investment strategy. ...
- Diversify your investment portfolio.
Mortgages are seen as “good debt” by creditors. Since the mortgage debt is secured by the value of your house, lenders see your ability to maintain mortgage payments as a sign of responsible credit use. They also see home ownership, even partial ownership, as a sign of financial stability.
References
- https://chinapower.csis.org/us-debt/
- https://usafacts.org/articles/which-countries-own-the-most-us-debt/
- https://www.theinsolvencyexperts.co.uk/secured-creditors/
- https://www.investopedia.com/terms/s/shorttermdebt.asp
- https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/start-up-financing-sources
- https://www.capitalone.com/learn-grow/money-management/what-is-debt/
- https://www.gmtresearch.com/en/accounting-ratio/short-term-debttotal-debt/
- https://www.investopedia.com/terms/d/debtinstrument.asp
- https://www.fool.com/the-ascent/credit-cards/how-much-debt-too-much/
- https://gtdebtsolutions.com/2023/06/14/how-much-debt-is-normal-for-your-age/
- https://www.investopedia.com/articles/investing/040115/reasons-why-china-buys-us-treasury-bonds.asp
- https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124
- https://en.wikipedia.org/wiki/List_of_countries_by_external_debt
- https://wallethub.com/answers/cc/how-long-to-pay-off-20000-credit-card-debt-1000423-2140858500/
- https://www.wemoney.com.au/blog/what-are-debt-securities
- https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/types-of-security/
- https://www.vedantu.com/commerce/debt-free-countries
- https://budgetmodel.wharton.upenn.edu/issues/2023/10/6/when-does-federal-debt-reach-unsustainable-levels
- https://www.nortonfinance.co.uk/know-how/debt-management/common-causes-of-debt
- https://www.credithuman.com/building-slack/the-dangers-of-short-term-financing
- https://www.gobankingrates.com/money/wealth/pay-off-debt-vs-invest-how-millionaires-prioritize/
- https://www.businessinsider.com/personal-finance/average-american-debt
- https://www.investopedia.com/terms/d/debtsecurity.asp
- https://en.wikipedia.org/wiki/Financial_position_of_the_United_States
- https://upsolve.org/learn/secured-debt-discharged-in-bankruptcy/
- https://www.equifax.com/personal/education/credit/report/articles/-/learn/understanding-credit-good-debt-vs-bad-debt/
- https://www.investopedia.com/terms/l/longtermliabilities.asp
- https://byjus.com/question-answer/financial-ratio-analysis-are-conducted-by-four-groups-of-analysts-managers-equity-investors-long-term/
- https://www.capitalone.com/learn-grow/money-management/types-of-debt/
- https://www.linkedin.com/pulse/different-forms-financing-we-must-know-apurba-deb
- https://study.com/academy/lesson/debt-securities-definition-examples.html
- https://www.investopedia.com/terms/d/debt.asp
- https://www.pgpf.org/top-10-reasons-why-the-national-debt-matters
- https://www.extension.iastate.edu/agdm/wholefarm/html/c5-92.html
- https://www.huntington.com/learn/saving/pay-off-debt-or-save
- https://percent.com/blog/what-are-debt-securities/
- https://brainly.com/question/30606927
- https://money.usnews.com/credit-cards/articles/what-debt-to-pay-off-first
- https://www.vantagedebtmanagement.co.za/get-rid-of-expensive-debt-once-and-for-all/
- https://www.treasurydirect.gov/government/historical-debt-outstanding/
- https://www.growthink.com/content/5-most-common-funding-sources
- https://data.oecd.org/interest/short-term-interest-rates.htm
- https://www.fultonbank.com/Education-Center/Managing-Credit-and-Debt/How-to-create-good-debt-and-steer-clear-of-bad-debt
- https://www.investopedia.com/articles/personal-finance/080615/highest-credit-score-it-possible-get-it.asp
- https://www.citizensbank.com/learning/how-much-debt-is-too-much.aspx
- https://www.itsuptous.org/blog/who-does-us-owe-money-to
- https://corporatefinanceinstitute.com/resources/fixed-income/debt-instrument/
- https://www.rewardinglearning.org.uk/common/includes/microsite_doc_link.aspx?docid=9699-1
- https://homework.study.com/explanation/explain-why-corporations-invest-in-stocks-and-debt-securities.html
- https://www.investopedia.com/articles/markets-economy/090616/5-countries-own-most-us-debt.asp
- https://www.statista.com/statistics/273488/countries-with-the-lowest-national-debt/
- https://www.nerdwallet.com/article/credit-cards/credit-card-debt-bad-debt
- https://corporatefinanceinstitute.com/resources/fixed-income/debt-security/
- https://www.yieldstreet.com/blog/article/debt-to-build-wealth/
- https://www.pgpf.org/infographic/the-national-debt-is-now-more-than-34-trillion-what-does-that-mean
- https://www.statista.com/statistics/500814/debt-owned-by-consumers-usa-by-type/
- https://www.quora.com/Does-Russia-currently-hold-any-debt-or-loans-from-the-United-States
- https://www.marketwatch.com/picks/i-have-20k-in-credit-card-debt-and-pay-400-a-month-just-in-interest-im-worried-about-this-large-sum-of-interest-im-paying-what-should-i-do-01675358619
- https://www.bankrate.com/loans/personal-loans/what-is-a-secured-loan/
- https://www.cbsnews.com/news/how-much-credit-card-debt-is-too-much/
- https://www.bankrate.com/personal-finance/debt/secured-vs-unsecured-debt/
- https://en.wikipedia.org/wiki/National_debt_of_Japan
- https://www.investopedia.com/terms/s/secureddebt.asp
- https://www.chase.com/personal/credit-cards/education/basics/what-is-debt-to-income-ratio-and-why-it-is-important
- https://fmtrust.bank/money-moves-article/is-short-term-or-long-term-financing-best-for-your-business/
- https://www.elibrary.imf.org/view/book/9781475510102/ch002.xml
- https://www.schwab.com/learn/story/what-are-different-types-investment-securities
- https://www.investopedia.com/terms/c/currentassets.asp
- https://quizlet.com/108236792/chapter-18-financial-management-flash-cards/
- https://quizlet.com/288464328/chapter-9-short-term-debt-flash-cards/
- https://www.marketwatch.com/guides/banking/americans-broke-study/
- https://www.investopedia.com/ask/answers/06/currentportionlongtermdebt.asp
- https://www.debt.org/advice/good-vs-bad/
- https://www.investopedia.com/terms/d/debtfinancing.asp
- https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
- https://www.imf.org/en/Blogs/Articles/2023/09/13/global-debt-is-returning-to-its-rising-trend
- https://www.toppr.com/guides/business-management-and-entrepreneurship/growth-challenges-entrepreneurial-venture/sources-of-financing-business/
- https://www.genisyscu.org/genisys-blog/why-is-a-mortgage-good-debt-to-have
- https://www.linkedin.com/pulse/who-going-buy-all-us-debt-rod-khleif-gdete
- https://en.wikipedia.org/wiki/United_States_Treasury_security
- https://corporatefinanceinstitute.com/resources/commercial-lending/debt-financing/
- https://www.investopedia.com/ask/answers/110614/what-difference-between-secured-and-unsecured-debts.asp
- https://www.mahoningmatters.com/news/local/article283521493.html
- https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp
- https://www.fool.com/knowledge-center/accounting-examples-of-long-term-vs-short-term-deb.aspx
- https://www.cbsnews.com/news/how-to-pay-off-15000-in-credit-card-debt/
- https://www.investopedia.com/ask/answers/06/keyplayersbondmarket.asp
- http://www.quickmba.com/finance/debt-valuation/
- https://www.coregroupus.com/the-planner-blog/what-is-the-difference-between-short-term-and-long-term-debt
- https://www.unfcu.org/financial-wellness/50-30-20-rule/
- https://www.quora.com/How-much-does-America-owe-to-other-countries-and-how-much-do-those-countries-owe-America
- https://www.cnbc.com/select/secured-loans-vs-unsecured-loans/
- https://www.quora.com/If-China-sells-all-US-treasury-bonds-what-will-happen-to-the-US-economy
- https://www.cbsnews.com/minnesota/news/good-question-how-did-the-u-s-debt-get-so-high/
- https://www.stenn.com/news/debt-financing
- https://www.investopedia.com/ask/answers/110614/what-are-main-categories-debt.asp
- https://www.forbes.com/advisor/debt-relief/types-of-debt/
- https://help.paloalto.com/hc/en-us/articles/115004948847-What-is-the-difference-between-short-term-and-long-term-debt
- https://www.kolberlegal.com/is-a-mortgage-secured-or-unsecured-debt/
- https://www.debt.org/faqs/americans-in-debt/demographics/
- https://www.cnet.com/personal-finance/banking/savings/should-i-save-money-or-pay-off-debt-first/
- https://www.cbsnews.com/news/how-long-will-it-take-to-pay-off-5000-in-credit-card-debt/
- https://www.lightspeedhq.com/blog/advantages-of-debt-financing/
- https://corporatefinanceinstitute.com/resources/accounting/short-term-debt/
- https://quizlet.com/127579998/mgt-241-midterm-ch-8-flash-cards/
- https://www.universalcpareview.com/ask-joey/what-are-the-three-classifications-for-debt-securities/
- https://homework.study.com/explanation/a-short-term-creditor-is-primarily-interested-in-the-blank-of-the-borrower-a-liquidity-b-profitability-c-consistency-d-solvency.html
- https://gfmag.com/data/companies-largest-debt-world/
- https://www.toppr.com/ask/question/the-costliest-of-longterm-sources-of-finance-is/
- https://worldpopulationreview.com/country-rankings/countries-by-national-debt
- https://www.bankrate.com/real-estate/what-is-the-28-36-rule/
- https://www.nycbar.org/get-legal-help/article/bankruptcy/types-debt/
- https://courses.lumenlearning.com/suny-personalfinance/chapter/7-4-other-peoples-money-an-introduction-to-debt/
- https://www.experian.com/blogs/ask-experian/types-of-debt/
- https://gocardless.com/guides/posts/debt-securities/
- https://www.bankrate.com/loans/personal-loans/risks-of-short-term-loans/
- https://en.wikipedia.org/wiki/National_debt_of_the_United_States
- https://www.usatoday.com/money/blueprint/credit-score/lowest-credit-score/
- https://www.visualcapitalist.com/government-debt-by-country-advanced-economies/
- https://www.inc.com/encyclopedia/debt-financing.html
- https://quizlet.com/240707132/ch-12-financing-loan-types-flash-cards/
- https://www.schwabmoneywise.com/essentials/good-debt-vs-bad-debt
- https://www.investopedia.com/ask/answers/033115/what-are-differences-between-treasury-bond-and-treasury-note-and-treasury-bill-tbill.asp
- https://help.tallysolutions.com/tally-prime/accounting-financial-reports/balance-sheet-tally/
- https://www.futurelearn.com/info/courses/business-planning-growth-and-successful-companies/0/steps/222376
- https://www.lendingtree.com/auto/refinance/pay-off-car-loan-early/