How to Recognize and Eliminate Bad Debt

In an ideal world there would be no debt- good or bad. In the world in which we live however there is a difference between the types of debt that most people carry. When you purchase a home or other assets that appreciate in value the debt is generally considered good debt, an investment in your future. On the opposite end of the debt spectrum you have bad debt, with payday loans and high interest credit card debt leading the pack

Signs of bad debt.

While any debt can become bad debt if it restricts your ability to grow financially, the following are warning signs of debt (or lenders) that are particularly toxic to your finances.

• Payday loans are a great example of bad debt for this reason, the interest rate for repayment of these loans is in the triple digits. More common which makes it more dangerous is credit card debt- which generally has a standard or default rate in the double digits making it harder to repay-keeping you in debt longer.

• The lender or creditor can change the terms of repayment or apply higher interest at any time with little restriction or provocation. You see this happening with credit card companies right now. You may have older or unused accounts canceled, your credit limit reduced and interest rates raised regardless of your payment history. You are not guaranteed fair treatment because you do something as routine as pay your bills on time.

• Lenders who make credit easily available, perhaps too easily may be trying to make it easier for you to spend more than you can reasonably afford to pay back, making it difficult if not impossible to break the cycle of higher payments that do little to reduce your debt.

Tips to unload bad debt.

Getting out of debt is not easy, in some cases it becomes so overwhelming that people avoid dealing with it completely. Ignoring debt will not make it go away instead you are just delaying the inevitable, there tips can help you begin the journey toward debt elimination.

• Get out of debt on your own. For many people the best (fastest, cheapest) way to get out of debt is to begin an aggressive repayment plan on your own. Referred to as the snowball method you begin by listing all of your debt, who and how much you owe and at the interest rates on the loans. You then begin paying the debts off one by one, starting with the most damaging (payday loans, or higher interest rate cards) putting as much money possible into your debt repayment. This may require picking up an additional job or selling some of the things cluttering up your home on ebay, but the goal is the same. Put all available money into debt repayment, paying the maximum available on one account while maintaining the minimum payments on the other accounts. When one account is paid off, redirect that payment to the next account you wish to pay off and continue until you are debt free.

• Avoid high risk solutions- Tapping into your home equity or 401(k) may seem tempting to get a lower interest rate but should be avoided if possible. In the current economy risking your home or banking on having your job for the next 5 years (or five months) is not sound financial planning.

• Look into social lending networks- Peer-to-peer lending is becoming more popular as securing traditional loans becomes more difficult. If you find the snowball method is not working, you may be able to secure a personal loan to consolidate your debt through a social lending network like Lending Club or Prosper.

• Recognize when you need help- If you find that your debt has become so unmanageable that the DIY method or social lending is no longer a realistic option, it may be time to throw in the towel and reach out for assistance. If you can no longer pay your minimum payments, lost your job or your debt is more than your annual income it may be time to look into other debt elimination options.