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What is the difference between 'good' debt and 'bad' debt? | Money Talks

Is your debt killing you or are you building wealth? Here's what you should consider when taking on debt.

TEMPLE, Texas — Not all of us can pay cash for big ticket items that we want. That is why in previous "Money Talks" segments we've talked about the importance of maintaining a good credit score. Over time you'll pay so much less. We know that there's bad debt out there. But is there good debt? Debt that a financial advisor likes, or can actually help you reach your goals?

What are you truly worth? And are you telling every dollar that you earn where it needs to go?

Is your debt killing you or are you building wealth? Certified financial planner Neil Vannoy has a plan to answer these questions. 

“It's easy to lose track of your total liabilities if you only focus on monthly payments. That's why I suggest creating a list of any debt you have, including the outstanding balance, interest rate and minimum monthly payment," he said.

In human history there was something called ‘debtors' prison.’ You couldn't pay and you lost your freedom. Life has changed, but as Vannoy told us you still have to be careful. 

"Sometimes we hear debt broken down into 'good debt' and 'bad debt,' but even good debt can end up hurting you if you get in over your head," he said.

Remember you can qualify for a home payment of up to 45% of your income, but that can make you what we call "house poor." Instead stay around 25% of your income. 

When it comes to student loan debt, you are investing in yourself, but Vannoy told 6 News you have to make sure that it will pay off! 

"Taking out college loans can be beneficial if you end up with an education that leads to a good career, but they can be a burden if you don't end up graduating or get a degree that doesn't increase your job prospects," Vannoy said. "Loans for things that depreciate – like cars – can get you into trouble. So be careful when buying a car or trading in a car that still has a loan balance to make sure you don't up 'under water.' meaning you owe more than the car is worth."

Remember, as long as you have debt, you don't really have freedom as others are counting on your money. Vannoy reminds us how much it could affect our lives. 

"Carrying any type of debt can limit your financial flexibility and ability to do things like move to a new city or take a job that you love for lower pay, so be careful about any type of debt you take on," he said.

The average American has $90,460 in debt, according to a 2021 CNBC report. But that did include all types of consumer debt products, from credit cards to personal loans, to mortgages and student debt.