Taking out a mortgage to buy a home is usually considered good debt as well. Like student loans, home mortgages generally have lower interest rates than other debt, plus that interest is tax deductible.

 

Even though mortgages are long-term loans (30 years in many cases), those relatively low monthly payments allow you to keep the rest of your money free for investments and emergencies. The ideal situation would be that your home increases in market value over time, enough to cancel out the interest you've paid over that same period.

Bad debt is debt incurred to purchase things that quickly lose their value and does not generate long-term income. Bad debt is also debt that carries a high interest rate, like credit card debt. The general rule to avoid bad debt is: If you can't afford it and you don't need it, don't buy it. If you buy a fancy, $200 pair of shoes on your credit card, but can't pay the balance on your card for years, those shoes will eventually cost you over $250, and by then they'll be out of style.

 

Payday loans or cash advance loans are some of the worst kinds of debt. In a payday loan, the borrower writes a personal check to the lender for the amount he wants to borrow, plus a fee. Then he has until his next payday to pay back the loan amount, plus the original fee and any interest incurred over that time period. Interest rates for payday loans are astronomical, starting at 300 percent annually.

 

So be a smart cookie! Review your situation, determine the best solution within your means, and make sure it will benefit you in the long run!