How to Differentiate Between Good and Bad Debt
Good debt can help lower your consumer credit score and qualify you for lower interest rates and more attractive loan deals. If your credit score is not ideal and you don’t have a lot of good debt, however, don’t fret. The good debt that is probably being currently reported in your consumer credit file – and most people have some – is already working for you to improve your credit score, and it's not difficult to acquire some more.
With a little help, you can turn bad debt into good debt. The process is easy and does not require intervention from a consumer credit counseling company. You will need an updated consumer credit report to get started. All three major consumer credit reporting bureaus operate online and provide viewable credit reports.
Free Annual Consumer Credit Report
The federal Fair Credit Reporting Act guarantees you free access to your credit report once a year through each of the three big consumer reporting bureaus: TransUnion, Experian and Equifax. To apply, visit AnnualCreditReport.com. (Beware of imposter websites that pretend to offer free credit reports, and instead have expensive trial offers.) You can request your credit report in one of three ways: online, by phone or through the mail. Requests made online are processed immediately. However, you must wait up to 15 days from from the time your paper application is received to get a credit report by mail.
Due to the sensitive nature of consumer credit files, you must authenticate your identity by providing your legal first and last name, date of birth, Social Security number, mother’s maiden name, current and previous home addresses, and telephone number.
Identifying Good and Bad Debt
On a credit report, debt is reported as either “potentially positive” or “potentially negative.” For example, student loans or mortgage loans would be considered potentially positive (good debt) and credit card debt would be considered “potentially negative” (bad debt). The reason is simple: Student loans and mortgage loans serve a greater purpose as well as create value, whereas credit cards, on the other hand, do not appreciate in value.
The age of a debt, the payment history connected to it, its type and its amount also play a pivotal role in whether a debt is working for or against you. Long-standing credit accounts that are paid in full at the end of each billing cycle are considered good because they demonstrate a positive payment history and low balance. Conversely, new accounts that carry a balance indicate financial need on your part and signal to future creditors that you may be living beyond your means.
Managing Good Debt Is Easy
The most effective way of making debt work for you is to pay it off at the end of each billing period – or at least down to within 30 percent of the credit limit – keep existing credit accounts open and in positive standing, and carry a good mix of accounts. According to MyFico.com, such a mix would consist of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. If you are a small-business owner, adding business loans to your consumer credit file may also help lower your credit score and improve your credit history.