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Debt is the amount of money you owe to a person or to an organization. The person who has a debt is called a debtor and the person or organization that lends money is called the creditor. There are two basic types of debts that people can incur. They are – good debt, and bad debt.

Types of debts

The two basic types of debts that an individual can incur are given below:

1. Good debt: When you incur debt to buy something that brings money in future, then that debt is a debt is a good one. This kind of debt helps to develop your financial health. This kind of debt can be considered as an investment. For example, if you borrow money to purchase a home, then it will be considered as a good debt. The reason is homes normally appreciate in value. Therefore, the mortgage loan that you take in order to pay for the home is considered as an investment.
School loans are also regarded as good debts. School loans are basically student loans. Nowadays, the cost of education has increased terribly. The students have to take loans so that they can study various courses. After completing these courses, they will earn a degree. Thereby they can get jobs and earn a lot of money in their lifetime. That is why student loans are regarded as good debt.

2. Bad debt: When you incur debt to finance things that can be consumed, then that debt is considered as bad debt. Normally, credit card debt is considered as bad debt. The credit cards are usually used to buy everyday items like clothes or food. A debt incurred to finance a vacation is also regarded as a bad debt. The reason is that you may feel healthier once you return from the vacation, but a vacation does not appreciate in value. Therefore, it is advisable not to incur debt to pay for a vacation.

It is advisable that you don’t incur too much debt, even if it’s good debt. If you’re overwhelmed with debts, then it will not matter whether the debts are good or bad, they will damage your financial health.