Not all debts are bad. Knowing the difference between good and bad debt is important in understanding how to utilize debt to your advantage. Some debts are good because they can augment your existing income or capital. These types of debts are in the form of:
But debts become bad when you fail to pay them on time and in full.
Utang is a topic that is not discussed openly. It is also often a modest but imprudent excuse for most people when the conversation turns to money. “Hindi ako mayaman. Marami nga akong utang. (I’m not rich. I have lots of debt.)”
Most people generally think that all debts are bad, which results in a collective fear of having them. However, we need to take a closer look at the purpose of debt. While some debts do not add value to your lifestyle, there are other types of debt that may be used to extend your finances. Thus, knowing the purpose will help you differentiate good debt vs. bad debt.
These are some activities and facilities where you’re introduced to debt:
See this related article: 5 rules on managing debts wisely
If you are unable to pay back borrowed money on time, then you have bad debt. This could harm your financial standing. Missing payments also results in overlapping increases in penalties, which further worsens debt.
What is the difference between good debt and bad debt?
Debt is considered bad if:
Debts incurred through loans are considered good debt if you’re aware why you are getting one, and it doesn’t lead to financial ruin.
Examples of good debts are:
How to focus on good vs. bad debt
Shifting from having bad debt to good debt takes time and involves major changes in financial mindset.
It starts by making wise decisions about your future . This means thinking about the benefits of what you’re getting when you’re taking on debt. For example, taking on a student loan to complete your postgraduate degree to help you get a high-paying job is a good form of debt because it is an investment in yourself that pays off in the future.
If you do happen to find that you have incurred quite a lot of bad debt, you need to develop a strong debt management strategy to clear it as soon as you can. You can read more here about how to manage debt wisely.
For most people, having no debt is close to impossible. So instead of beating yourself up about incurring debt, focus on choosing and managing your debts wisely. Get into the habit of building good debt with a Metrobank credit card. When you’re ready, consider getting a car loan or home loan with Metrobank.
This article is part of a collection of stories and practical financial tips that are published with the goal to help people learn from the experiences of others, and to pick out lessons on personal finance and sound money habits beyond the pandemic.