What's the difference between good debt and bad debt? Let's break it down...
Ever borrowed a cheeky $20 from your mate to cover brunch until payday? Or got a HECS loan from the Government to cover your uni fees?
Put simply, this is called debt. But before you get too worried, some debt is necessary... but other times, it’s not so good. In total, Aussies have some of the highest household debt in the world. Yep, we owe more than $2 trillion!
Getting a ‘lil more granular, the average Aussie owes around $3,925 on their credit card, and has a personal debt of $21,200 (excluding credit cards and property loans).
Let’s break it down.
Debt - in the financial sense - is money that’s borrowed by someone (aka you or me) from someone else (aka a bank or lender). Sound familiar? Yep, it kinda sounds like ‘credit’.
Think of it like this: if credit is money that you’re borrowing from a bank or lender, debt is the actual amount of money that you owe.
The most common kinds of debts are loans (i.e. mortgages, car loans, personal loans and credit cards)...And people take on debt for a bunch of different reasons, like to buy a house, a car, to pay their uni fees.
But...there’s good debt, and bad debt.
Debt can be considered ‘good’ if it helps you buy something that will grow in value over time, or provide you with another income.
So, good debt can be things like a mortgage (because real estate has historically increased in price over time), or a HECS loan (because university can help you get a job with a higher salary).
Debt can be considered ‘bad’ if it won’t earn you any money, or it is used to buy assets that fall in value.
So, taking out a credit card or personal loan to fund a new wardrobe or a holiday lives in this category.
The truth is, credit cards don’t have to be bad (but generally they are!). If used responsibly, credit cards can help manage cash flow, budget and pay for emergencies without dipping into our savings.
But the big question is: can you be trusted with a plastic card that allows you to spend $30,000?
If you have some debt you want to start paying down, you can:
If paying off your debts is becoming a little tough to manage, call your lender and ask if they can offer you a better deal, or a payment plan to help you manage your repayments.
They may be able to offer you plans with lower interest rates and repayment amounts to get you through.
If you’re feeling stressed about being in debt, getting some professional advice is always a good idea. Fortunately, there are lots of free debt counselling services available in Oz. The National Debt Helpline on 1800 007 007 could be a good place to start.
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