Sometimes we even hear about the “harmfulness” of credit, even from the most professional financial media. However, for the time being, there are no other alternatives to meet a person’s urgent needs. Loans have firmly taken their niche in our lives, and without them, many everyday problems would simply be insoluble. Therefore, it would be wiser to divide all credits into “good” and “bad”, but how to distinguish between the first and the second?
“Symptoms” of Bad Credit
If you can predict your financial situation in the future and you are confident of your current stability, a small loan will not hurt you.
In general, credit is an integral part of any healthy trading and economic zone. With the help of loans, goods and services turn around much faster, so the borrower can expect increased profits, given that the loan will be repaid on time and in full. Problems with loans start when a company or individual has not been able to realistically assess their options and the debt is only “cascading”: the borrower does not have enough money to pay off his previous debt in full, so he has to draw up the next loan. And so credit after credit.
In the midst of this clutter, however, there is a circumstance that helps distinguish between “bad” credit and “good”: credit is the spending of your future profits, which is drafted in an urgent way to get a specific benefit. The opposite can easily be inferred from this: if you start receiving an increased income after receiving and repaying the credit, then such credit has the right to be called ‘good’. Such situations may be covered by loans taken to increase production in the enterprise or for the purpose of opening a business. In this case, your income will cover all the costs associated with the loan or credit you have taken, and as a result, you will gain “pros” rather than stay “minus”.
But if you still decide to taste the chef’s advertised dinner at the best restaurant, but you don’t have enough money for it, and you pay by credit card, then this is the fastest way to go bankrupt. This spending of credit is not justifiable and its purpose will not help you to repay your debt in the future. These are the types of loans that should be called “bad”.
Credit itself is not a bad thing, just like buying the necessary things with credit. But if the items to be purchased do not have a positive impact on the amount of expected income, then you may consider that you have bought them at a higher price because you will have to repay not only the price of the item itself but also the loan interest. And this kind of action hits your pocket twice because:
1. At best, it will not have a positive effect on expected profits and will often require additional expenses.
2. You will have to pay for the purchase by paying the loan interest.
How to Make a Mistake With a Credit Choice
We can list endlessly the possibilities for which we could spend the “bad” credit. Many of us are accustomed to not giving up anything, and we don’t even want to look ahead and plan our future spending so that we can put money first to pay off our credit. There is a much shorter list of things we can spend on the “good” credit.
1. Training and education. Loans used for such purposes are almost always “good” because they are investments in your future or your children’s future. The loan taken will certainly turn into direct profit in the future in the form of a good profession and salary. But one important factor must not be overlooked: credit must be spent on paying the right profession at a prestigious university.
2. Loans for real estate purchase. This type of credit will always be considered “good” because paying for a year’s rent is too expensive. For exactly the same money, you can repay your mortgage and become a full owner of your home in a few years.
Mortgage lending can also be used in the opposite direction, but also with the benefit that you apply for a home loan that you will rent out later. With the money you receive from the rent you will be able to repay the loan itself, and as a result you will get the apartment in your full possession for free! In any case, any real estate property is “frozen money”, which in the worst case scenario can be recovered in cash by selling real estate.
3. Business Purchases. Loans for such purchases provide that the purchased items will be able to “make money” in the future. There are many, many examples:
• a car taxi driver will earn much more profit than renting a car;
• a sewing machine for a tailor professionally sewing custom-made clothing;
• Camera for popular photographer, etc.
But even before you take out a “good” loan, you have to compare the expected return with the minimum loan payment.
If the first is larger than the second, then the credit is guaranteed to be “good”. However, when buying business things, exceptions are relatively rare.