However, according to the Federal Reserve’s Flow of Funds Report, household debt fell by $30 billion in the third quarter of 2008.
While this may sound like good news it is really a result of some negative circumstances. As the credit crunch looms consumers are finding it more difficult to obtain financing for good debt items such as real estate and college tuition.
Paying off bad debt will save you money over time and put money back in your pockets. But there is a difference between good and bad debt.
Good debt is debt that holds a future payoff to you. Creating debt for a mortgage can be considered good debt if the interest rates are low and real estate values are expected to rise over time. Another good debt would be investments (perhaps not the stock market these days). Social Lending Invest money in prime borrowers. Average net annualized returns of 9.9%.
College tuition holds a future payoff as statistics show that college graduates earn more money than high school graduates. According the U.S. Census, adults 18 and older with a bachelor’s degree earned an average of $51,554 in 2004, compared to $28,645 for those with a high school diploma. Those with advanced degrees took home an average of $78,093 a year.
Bad debt would be considered high interest rate credit cards and retail cards. The store credit cards can be the worst. We have all been tempted by store clerks to open those “instant” credit cards to save 10% off a purchase. It’s not worth it.
Store credit cards offer some of the HIGHEST interest rates. If you have any bad debt, pay it off as soon as possible. Start to pay your highest interest rate credit cards off first.
You want to get rid of those immediately. Never, if possible, pay the minimum due on your high interest rate credit cards. It will only cover the interest owed and almost never attack the principal balance. See Eliminate Debt to find out how paying the minimum will keep you in debt.
Continue getting rid of bad debt by paying off one high interest rate credit card after another while paying the minimum on your other credit cards.
In the meantime, take steps to reduce household expenses such as grocery shopping and transportation costs. Reduce discretionary expenses such as entertainment, Starbucks coffee and eating out.