In the world of finance, a simple, but often overlooked fact is that not all debt is created equal.
What does this mean? Simply put, it means that there is debt and there is really bad debt. While
it’s not always possible to be 100% debt-free, you should always strive to be 100% BAD debt-
free.
Number 1: Defaulted Debt
Taking the top spot on this list is the debt you may already have, but haven’t kept up to date on
with payments. When you default, it is reported to the credit bureaus by the lender and your
credit score can sink like a stone...especially if you’ve had numerous late payments as well.
Calls from debt collectors and difficulty obtaining new credit due to the mark staying on your
credit report for seven years are just part of the problem. You may get additional fees tacked
onto your original balance as well. You can stop this kind of bad debt before it gets started by
contacting your creditor as soon as you realize that you’re going to have trouble making
payments. Try to work out a payment plan, and if you’ve already defaulted, do the same by
trying to obtain some type of settlement agreement.
Number 2: Payday loans
Far and away, one of the worst kinds of debt to be in is this. But what exactly is a payday loan?
It’s a loan a borrower takes before his actual payday from an external lending entity. The
borrower writes a check for the amount that they want to borrow along with typically exorbitant
fees and interest charged by the lender. It’s quick and easy, but the finance charges can range
from $15 to $30 for every $100 borrowed. A typical two-week payday loan with a $15-per-$100
fee equates to an annual percentage rate of 400%! These loans can be a slippery slope, and It
can be difficult to get out of this cycle once you get into it. Avoid them at all costs.
Number 3: Credit card loans
Since credit cards of any type are available to practically anyone, it makes getting access to
borrowed money extremely easy. Interest rates average around 17% but can go as high as
more than 20% in some cases, making it just about the most expensive type of debt that one
can carry. In fact, these kinds of debt can remain for decades. For example, if you owe $10,000
and continued to make only the minimum monthly payments, it would take about 30 years to get
out of debt. It’s easy to succumb to the temptation of credit cards, given their cheap availability
and supposed “perks” such as cash-back programs, airline miles or frequent flyer credits, and
various other “rewards.” The truth is they’re a horrible debt trap if you aren’t responsible enough
to pay your balance in full every month, so you don’t incur any finance charges.
Number 4: Tax Debt
If you owe back taxes and haven’t made an effort to set up a payment plan, expect the IRS to
come calling. Some might argue that this is the worst kind of debt to have, and there may be
some truth to that. They will take their pound of flesh, including wage garnishment, placing a lien
on your property, and even revoking your passport (they cannot though, take money from need-
based retirement benefits, such as Supplemental Security Income). If you have taxes you
cannot pay, don’t avoid it. File a return and see if you can work out a payment plan. You may
also qualify for an Offer in Compromise, which allows you to settle your taxes for less than the
full amount owed.
Number 5: Car Loans
Car loans are never a good idea. What sense does it make to take out a loan of $20K or more
to pay for an asset that will depreciate as soon as you take ownership of it? That’s just throwing
good money after bad. Unless it’s a rarity or any kind of valuable retro or classic car,
automobiles simply not worth going into debt over. If you’re able, save up for your next car, and
simply pay cash for it.
Number 6: Student Loan Debt
Some may argue that this type of debt could be categorized as “good” debt. While I would never
discount the value of education, often people take on student loan debt without much
forethought. If you’re not completely sure of your interests, and what you would like to do
professionally upon graduation, it makes more sense to simply get the basic general education
requirements out of the way at an affordable junior college, and not go into massive debt. Once
you have a better idea of what you’d like to pursue professionally, then it makes sense to obtain
a loan to complete your studies if need be. But again, consider your options, such as grants,
scholarships, work-study programs, and paid internships. Many young people graduate from
college totally burdened by debt and find it difficult to pay basic living expenses. Falling behind
or defaulting on student loan debt will just cause you to incur additional fees.
The worst types of debt are those where you do not realize any benefit afterward. Debt which
does not help you increase your net worth in some way has no future value, and the kind that
you’re unable to pay back on time is all considered bad debt. Stay away from these as much as
possible, and your financial future will be much brighter.
Are you experiencing some type of hardship in your life like a death in the family, health issues,
divorce or a job loss that is impacting your ability to keep up with debt obligations? If so, you
may qualify for a debt settlement program with Financial Rescue. Our IAPDA-Certified
Consultants can reduce the total amount of debt that you owe by 40%- 60% on average, and
dramatically reduce the length of time it takes for you to pay those debts off. Call us at 877-973-
3287 for a free, no-obligation consultation or submit a form on our website to learn more.