Good debt versus bad debt
What is good debt and what is bad debt?
Bad debt is when you buy items that inherently go down in value, for example cars, toys, gadgets and even clothes. If you buy these items on credit card or you use debt to acquire them then that is classified as bad debt because those items will decrease in value.
Good debt on the other hand is when you use debt to buy items that will increase in value. If it can generally be assumed that real estate goes up in value and you take out a mortgage to buy a property and it doubles in value over the next ten years, then even if you haven't paid down the mortgage, you will still be better off. Although the size of the mortgage is the same the value of the property has doubled.
Many people have acquired huge amounts of bad debt. The challenge is they think they're ok because their house has gone up in value (often their home has gone up in value more than what they owe on their credit cards, giving them even more comfort). But they still have the debt and they're paying interest on the debt. Interest on credit card debt is often at a much higher rate - sometimes 20 percent or more - compared with the debt on a property.
What debt do you have? Write down how much good debt you have and how much bad debt you have. If you have bad debt, write down a plan to eliminate this bad debt.
Consider debt consolidation
If you have a large amount of bad debt you may consider consolidating your debts. Consolidating your debt means paying off your high-interest debt and replacing them with one large, low interest rate loan. Consolidating your debt in a single low-interest loan can save on interest payments and speed the process of paying off debts.
However, debt consolidation won't help if you don't change your spending habits. It is critically important to live within your means and do whatever you can to accelerate the process to becoming debt-free. If you don't then you will find yourself in a far worse financial position in the future.
Talk to your mortgage broker to determine whether consolidating could work for you.