It comes as a surprise to many people that taking on debt can make wise financial sense. Of course, certain types of debt are undesirable, but under the right circumstances, taking on debt can be the first step toward building good credit and putting yourself on the road to financial security.

As a general rule, debt incurred for the purpose of investing in something that will increase in value over time is a positive debt. On the other hand, borrowing money to purchase something that will decrease in value is considered a bad debt. These are somewhat simplistic explanations, but some illustrations may be useful in showing the difference between a good debt and a bad debt.

Some debts that are generally thought of as good debts include: student loans, home loans or mortgages, and business loans. Why? Because these loans are thought to be investments in something that will one day pay off and be more valuable than when originally purchased.

Given the recent events in the housing market, it may seem odd to think of a mortgage as "good debt," but there is another reason these debts are preferable. Interest that accrues on mortgages, home equity loans, and student loans is generally tax-deductible for the borrower.

In comparison, credit card debt and auto loans represent examples of bad debt. Automobiles and the various things we buy with credit cards tend to be things that are not investments toward future wealth. A car, for example, loses much of its value after it driven off the dealer's lot. While you pay interest on the car loan, the car never increases in value, in fact, the longer you pay, the more in decreases in value.

When it comes to matters of credit, you want to be sure that your bad debts under kept under control. A credit rating agency will look at your total amount of debt, but they may also look at the type of debt you owe when determining your credit rating. The existence of good debts shows someone who understands how to maintain his or her finances, while excessive bad debts may make someone appear to be a bad credit risk.

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