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Safe debt vs. unsafe debt: What’s the difference?

On Behalf of | Feb 24, 2017 | Debt Relief

While most people would prefer not to think about it, the simple truth is that many are deeply in debt. Indeed, a recent survey by NerdWallet determined that the average U.S. household owed $132,529 at the end of 2016.

All of this naturally raises the question as to just how much debt a household can carry before crossing the line from being financially healthy to financially moribund.

While there is unfortunately no definitive answer to this question given that everyone’s economic circumstances are different, experts have nevertheless indicated that consumers shouldn’t be afraid of carrying debt — provided they are aware of the differences between safe debt and unsafe debt.

What would be considered unsafe debt?

The consensus among experts is that credit card debt is by far the number one form of unsafe debt. This, of course, can be attributed to its high interest rates, which the financial site Bankrate determined are currently hovering around 16.43 percent, and the fact that it can hit a person’s finances very hard — even if they are making regular payments above the minimum balance.

It’s for this reason they advise never carrying credit card debt for more than a month and, if this is not an option, attempting to pay it down as quickly as possible.

What would be considered safe debt?  

Two forms of debt that experts identify as being relatively safe (in moderation) are student loans and mortgages.

The reason is that in addition to offering fixed — and considerably lower — interest rates, these forms of debt give consumers tax breaks that can free up funds for investments or savings.

What should consumers do in the event they are ever debt-free?

In the event consumers ever find themselves in the enviable position of being debt-free, experts indicate that their priority should shift to setting aside funds for any unforeseen future expenses, such that they can continue to enjoy their debt-free existence.

It’s also important for consumers to understand that when their debt has spiraled out of control and they simply cannot get it under control despite their best efforts that there are viable debt relief options available.   

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