If building a good credit record is important to you, you need to know that the credit bureaus look and rate the different types of credit. They actually consider some credit accounts as being of less desirable and will lower your credit score if you rely heavily on them. Specifically, some instalment type accounts or loans, especially unsecured loans, may be viewed in a negative light.
Good debt v/s bad debt
Good debt is debt owed on an item that brings more value into your life than it takes in the form of money paid out. Good debt is temporary debt which ends with you having gained more than you invested. Debt taken on for what you think is a good reason isn't necessarily equal to good debt. For instance if you take a personal loan to pay off a hospital bill, it might have been an essential debt but would not qualify as good debt.
Bad debt occurs when you borrow to invest but the value of the investment drops over time. This means that the asset is non-income producing and interest on the loan is not tax-deductible, for instance credit card debt or personal loans. If you find yourself with a lot of bad debt, budget your way out. Remember, debt and credit cards are tools that if managed properly can work to your advantage.
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About the author -
Rajiv Raj is a credit expert with 15 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities. You can email Rajiv Raj at rajiv.raj@creditvidya.com.
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