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What Are the Different Types of Good and Bad Debt?

Not all debt is equal; there is good debt and bad debt. If you are a debtor, debt is good if it will help you accumulate wealth in the future. Good debt is something that you will make money from over time such as home loans, student debt, or borrowing to expand your business.

Just by regularly paying down your debt you can benefit. That’s because you build up a good track record in your credit file, making it easier to borrow when you need ‘good debt’ in the future. A good record may also mean you benefit from lower interest rates, or at least avoid higher ones.

Bad debt, on the other hand, is lost money. Debt is bad when you’re borrowing unnecessarily for goods or services that won’t help you financially in the future. It usually means you’re living beyond your means and falling behind financially.

From the perspective of the creditor, good debt will be paid within an agreed timeframe, potentially with interest, depending on the agreement. Bad debt is the debt that is not collectible and will need to be written off.

Bad business debt could result from lending money to an unreliable customer, a customer whose circumstances suddenly change, or from fraud. Sometimes the cost of pursuing a debt through a debt collection agency is not worth the value of recovering it.

Most businesses make sales on credit. This debt is treated as an asset however, it is typical to have some provision for bad debt in the accounting process to try to protect themselves from write-offs.

Debt collection software such as iCollect is a highly effective way for businesses to deal with late and unpaid bills – better to find a way for the debt to be collected than end up paying for it yourself!

AUTHOR

Dave Manville

All stories by: Dave Manville