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The difference between good debt and bad debt

Not all debt is created equal. In fact, some debt is actually considered to be good.

Most people think about debt as something that should be remedied right away, something to be ashamed of. Part of that stigma comes from the impact debt can have on your credit score. But credit scores are actually more complicated than that. They factor in whether the debt is good or bad.

Everyone should check their credit score periodically, and when you do, look at the break out of how it's calculated. You can check your credit score for free on sites like Credit Karma. Your score total, which is a number between 300 and 850, is weighted by several factors.

The age of your credit (e.g., how long you've had your loans and credit cards) is one of those factors. Another factor is what percentage of your credit limit you are using. This can be improved by having a higher limit and using less of that limit. Paying off your balances is also weighed into your credit score. Most of these factors fall in line with the idea that you shouldn't spend money you don't have or can't repay.

But there is at least one instance where that mantra doesn't hold.

Having a mortgage is considered good debt. Even if your mortgage is hundreds of thousands of dollars, it is probably good debt to have. Of course, you don't want to go overboard and net a monthly mortgage payment that is more than 50% of your monthly take-home income. That situation could easily lead to defaulting on your payments. A better percentage to aim for is more like 25% of your income.

Your credit score isn't going to reflect how much you will have to pay for home owner's insurance, property taxes, or HOA dues, so that is something you will need to consider on your own when summing up your monthly payment. Common home buying sites like Redfin and Zillow offer these types of calculators. Rather, your credit score will indicate how much you have left to repay on your home loan.

The fact that you qualified for a home loan is a positive indicator in and of itself. So as long as you've selected a home that comes with an affordable monthly payment, you are in great shape and you are improving your credit.



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I'm Kat, the author of the healthy, happy blog. Using my background in science, personal training, and writing, I post about how to be successful in four main areas of your life: finances, body, mind, and home.

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