It is nearly impossible to go through life without accumulating debt. New Jersey residents know that better than most. The average debt of $62,300 per capita for residents of the Garden State is significantly higher than the average American’s $47,500. Not all financial obiligations are created equally, though, and it’s important to know the difference. In its simplest terms, “bad” debt should be paid off quickly, while you can give yourself more time to secure a zero balance on “good” debt. Why? We’re glad you asked.
Good debt is generally associated with positive consequences, namely increasing your net worth or helping you to generate value. Nothing is guaranteed and you should always consult with a trusted financial advisor before making big purchasing decisions, but here are some examples of “good debt.”
While most people can reason that the more money you put down on a home, the less you’ll owe and the less you’ll pay in interest over time, many of us cannot pay for a home with cash. Borrowing money to finance a home is considered “good debt” because it has the potential to grow in value. Mortgages also tend to have lower interest rates than other debt, plus the interest you pay on your home is usually tax-deductible. So, while you are paying to borrow money, you are also saving on your tax bill. If your mortgage has a high rate, consider refinancing later if rates fall. Use NVE’s mortgage calculator to determine how much you could save with a new loan.
While a college degree alone does not equate to guaranteed wealth, generally speaking, the more education a person completes, the greater his or her future earning power. On average, college graduates earn at least 25% more than their high school graduate counterparts. For this reason, taking out a student loan is often considered a wise investment, and likely to provide a hefty return.
You can have all the good ideas, talent and work ethic in the world, but sometimes it’s just not enough to launch or maintain a new or growing business. Business loans are often a necessary tool to ensure the growth and eventual success of a commercial enterprise. When handled properly, this type of debt could be a cornerstone of the foundation of your future wealth. NVE Bank has been part of the local landscape for over a century, so we know northern New Jersey and its surrounding areas. When it comes to commercial lending, our specialists can guide you every step of the way through the lending process. If you have questions about any of our Commercial Loan services, call an NVE Commercial Loan Officer at 201-816-2800 or visit www.nvebank.com for more details.
The easiest way to determine whether something you’ve purchased is in the “bad debt” category is if it goes down in value immediately and/or does not increase wealth. This often includes disposable items or durable goods purchased with high-interest credit cards. Every month that you make a partial payment on your credit account, you are charged interest and the amount you owe increases, while the item’s value continuously decreases.
Making only the minimum payments on your credit cards while continuing to keep balances on your accounts is the most common form of bad debt. Add late fees or other penalties and the amount you pay will almost definitely exceed the value of the products or services you financed using the credit card. By paying more than the minimum payments on credit cards whenever you can, you will not only reduce the lifetime of the loan but you’ll also accrue less interest in the long term.
Store Credit Card
Look in your wallet — how many retail credit cards are in your name? If you have any, chances are you opened them to cash in on a one-time discount. While you may have benefited from a designated percentage off the cost of that initial purchase, what you may not realize is how insignificant that savings could be in the long run. Due to the commonly high interest rates on these types of card, if you don’t pay the balance off immediately, you could be in for some steep interest charges. If you must charge retail purchases and know you may not pay them off right away, consider using your regular credit card, which likely has a lower interest rate.
It is important to note that there is some gray area when it comes to determining whether debt is bad or good. For example, auto debt is generally considered to be bad because cars depreciate as time passes. However, there’s also the argument that taking out an auto loan is good debt, IF you are able to finance the vehicle on highly favorable terms. If you can finance a car for three years or less, or if you can make such a large down payment on a car that the monthly installment payments are low, those are terms most banks would consider favorable. So, in the case of auto debt, the determination of “bad or good” is a matter of circumstances.
NVE offers an array of lending products and services to meet the diverse needs of both consumers and businesses. Visit our website to learn more. You can also speak with one of our knowledgeable Branch Associates by visiting your convenient neighborhood branch, or call us at 1-866-NVE BANK (683-2265).