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Financial Literacy Month: Debt 101

a computer, calculator and financial papers

When it comes to finances, debt is one of the biggest buzzwords out there. You may have been led to believe that all debt is bad and that it is impossible to get out of, but that’s not true! Read on to learn all about good and bad debt, how to avoid getting into it and how to get out of it if you do.

What is Debt?
Simply put, debt is when you owe money to another person or entity like a bank, lender or company. Some of the most common types of debt include credit card debt, student loan debt, mortgage debt, car loan debt and personal loan debt. While there are many kinds of debt, not all of them are considered the same.

What is Good Debt?
Although it may seem like an oxymoron, there is good debt. Good debt can be thought of in terms of investments that will generate value for you in the future. For example, a mortgage is usually considered good debt because it is structured, usually has a low interest rate and is for a product-your home-that may increase in value over time. Students loans are also often considered good debt because they are an investment toward future earnings.

What is Bad Debt?
Bad debt is the kind that you think of when you hear about people being “in debt”. Bad debt is usually involved when someone purchases something that loses value fast or that does not gain value or that have high interest rates. Examples of bad debt include credit card debt, payday loans and cash advance loans.

How Do I Avoid Debt?
Avoiding debt can be almost impossible, but that is not necessarily a bad thing. The important thing is to avoid bad debt that can cause you to have financial troubles in the future. Avoid making purchases on things you can’t afford just because your credit card limit will allow you to. Avoid taking out payday loans and cash advance loans and work hard on living within your means. Check out our previous blogs Budgeting 101 and Savings 101 to help you get on the right financial track and keep yourself free of bad debt.

How Do I Get Out of Debt if I’m Already in It?
If you are already in debt, you’re not alone. According to a NerdWallet analysis last year, the average household has $15,983 in credit card debt. However, you don’t have to stay in debt forever. To start with, stop purchasing items that you can’t afford and instead focus on living a lifestyle that you can afford and putting the savings toward your debts to pay them off faster. Here are some great tips to get out of debt faster:

  • Pay off the debts that are costing you the most first. Prioritize high interest credit cards over low-interest ones and focus on paying those off first.
  • Make concrete goals to pay off your debt in a set amount of time and stick to your goals. If you owe $1,200 on your credit card and you give yourself one year to pay it off, plan to pay $100 per month, plus whatever interest you incur, and stick to it!
  • Ask for a lower interest rate from your creditor. You would be surprised what you might be able to achieve if you only ask!
  • Contact a nonprofit credit counselor for help if your debt is too much to handle. You can connect with a certified counselor at the National Foundation for Credit Counseling.
  • Never pay anyone to get you out of debt. Working with a company that says it will get your debt negotiated down will usually result in ruining your credit.

Managing your debt is a crucial step toward financial independence. Tune in next week for Identity Theft 101 to learn all about identity theft, and how to avoid it.