Debt Prevention Tips

Definition:

Debt is that which is owed; usually referencing assets owed.

Introduction

A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society, debt is usually granted with expected repayment; in many cases, plus interest. Debt can be necessary if one really needs to borrow money to do something urgent or useful. However, if one does not know how to manage debt, the outcomes could be unimaginable. Hence, it is always useful to know how to manage your personal debt.

Pros and Cons of debts:

Pros:

1. Allows one to pay for something (Urgent / Useful / Important etc.) that is not within their financial limits.
   
2. By not paying everything in full, it allows one to have cash reserves, hence not wiping out a person’s entire finances with one purchase (House / Car etc.). This in turn allows one to have emergency funds.

Cons:

1. Most debts require one to pay interest in commensuration to what they have borrowed / their debts. Hence, though it allows one to pay over a period, one pays more for the thing then what he should.
2. If one do not pay up the installments of the debts owed on time, heavy interests will be incurred (Credit Cards etc.).
3. Poor debt management will lead to one having the interests plus the debt compounded, hence, making one sink deeper and deeper into debt.

Types of debts:

Introduction: Contrary to popular belief, not all debts are bad. Debts are classified into two main types – Good Debt and Bad Debt.

Good Debt:

Good Debt is debt that can provide an income, like owning land or a vacation home. An example of good debt is borrowing to buy or remodel your home. This adds more equity and allows you to make a tax deduction on the interest you pay. You could also use the refinance money to advance your own career skills by earning a degree, which can lead to better pay.

Bad Debt:

Bad debt refers to debt you have taken on for things you do not need and cannot afford. Examples of bad credit include borrowing money to pay off other loans, creditors calling for payment, paying only the minimum on credit cards, borrowing money to pay regular bills, and being turned down for credit.