Explaining the Different Types of Consumer Debt


According to the latest reports, an estimated eight in ten Americans are in debt at this point. Many of those who fall into this category owe nearly $100,000, but for some, the figure is even more massive. While many people consider owing such large amounts of money to be a bad thing, that’s not always the case. In truth, there’s good debt and bad debt. Many companies offer free debt calculators to help people determine just how much they owe and which percentage of their debts fall on the latter end of the spectrum.

Understanding the Different Types of Debt

First, it’s important to understand that everyone owes a certain amount of money. Expenses like vehicle insurance, utilities, and certain other recurring expenditures that will never be paid off are unavoidable. Those expenses generally don’t work for or against consumers unless they’re gravely behind on the power or phone bill or some other element in this range. In fact, they don’t even factor into people’s debt-to-income ratios. Aside from those monthly bills, expenses begin to branch out into the categories of good and bad.

Bad Debt

Credit cards are among the most common types of bad debt. People often have multiple credit cards with lofty interest rates, and they generally only make minimum monthly payments. Store charge accounts can also be negative when it comes to analyzing a debt-to-income ratio. Though keeping some of these accounts current can work in favor of a person’s credit score, have several accounts or letting them get behind isn’t a good thing. Having sizable auto loans is typically considered bad debt as well.

Good Debt

When it comes to good debt, creditors tend to look at all the outlays that can help a person build his or her worth. Education expenses are prime examples of this type of debt as long as they apply to a field with a high probability of being practical and a high earning potential. Student loans for some areas of study can certainly be considered bad debt in the eyes of creditors. Mortgages and expenses related to business ownership are both classified as good debt under typical circumstances.

Finding Balance

Most people have both good and bad debt. Few Americans are able to get through life without at least one credit card or charge account. At some point, nearly everyone has to take out a loan to purchase a vehicle. At the same time, everyone has to pay standard utility bills and similar monthly expenses. It’s a matter of finding a balance between those expenses and the ones creditors consider good, such as student loans and mortgages.

Even those who manage to find a balance often find the scales tipping in the wrong direction at some point. In those cases, getting help with bad debt is crucial. Several options are available for dealing with debt, including management programs, consolidation, and other solutions. If you’re in need of assistance, it’s important to reach out before bad debt gets out of hand and takes over.