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The Three Different Kinds of Debt and How to Avoid Them

Being overwhelmed by finances is never good, but we all know the feeling. Creating a budget is a good place to start, but if you don’t know the truth about different kinds of debt it will be hard to know what you’re getting into. Before you get in debt, you should know what types there are and how to avoid them if possible.

Impulse Debt

Erase DebtShopping for food on an empty stomach has shown us all how expensive impulse buying can be. Whether it’s potato chips or a new custom-made side table, collector’s edition chess set, or just a regular old shopping spree, buying on a whim can really set you back, especially when you buy on credit.

When your credit card balance or bank overdraft fees begin to manifest your poor spending habits, you’ll know that the impulse purchase you just made is the beginning of a lifetime debt. The best way to control this kind of debt is to set up a plan for yourself. Don’t carry a credit card everywhere you go, and if you find something you just have to have, talk it through with someone you trust before going ahead with the purchase.

Crisis Debt

Sometimes you just can’t predict what expenses are going to come up. Whether it’s a broken leg, a dying washing machine, or unemployment, unexpected expenses can sometimes lead to debt. A poor way of dealing with these situations is to survive on a loan. But a much better solution is to take money out of your emergency fund, long term savings, investment fund or the retirement fund, preferably in that order.

Although it can be hard to set money aside with all the monthly expenses you have, you should make a conscious effort to put some cash into savings every month for the sole reason of paying for emergencies. You’ll have better peace of mind and a way to save yourself a lot of money when situations do crop up.

Premeditated Debt

Debt isn’t always a bad thing. In fact, we often intentionally plan for specific debts like car loans, mortgages and student loans. The difference between “good debt” and “bad debt” is purpose. Good debt is for purchasing something that will pay for itself like a business loan, an appreciating piece of real estate or an improvement in our marketable skills. So even debt for a college education may or may not be “good”. If it helps you get a better job it is “good” if it is for “underwater basket weaving” or some other form of study that doesn’t improve our marketability it may not be so good. While putting money toward important life goals is definitely a good thing, don’t forget these still have to be paid off as well. Make sure you have thoroughly researched what you’re getting into and know how you’re going to pay it off.

You might need to talk with your bank about lowering monthly payments or interest if you have a lot of other accounts to take care of. When pursuing this approach, it is often a good idea to utilize a debt counseling service like Creditguard.org. Some even offer free consultation. These agencies act on your behalf and negotiate lower payoffs, help to restore your credit rating, and work closely with the credit card companies and collection agencies to be sure they honor their agreements.

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