Understanding Debt - Good Debt vs. Bad Debt
Debt can be a powerful tool or a heavy burden. Learning the difference between "good" and "bad" debt is crucial for young women to make informed financial decisions and avoid common pitfalls.
Key Concepts
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Debt: Money owed to another party.
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Principal: The original amount of money borrowed.
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Interest: The cost of borrowing money, usually expressed as a percentage of the principal.
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Good Debt: Debt that can help you acquire assets or increase your future income (e.g., student loans for education, a mortgage for a home).
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Bad Debt: Debt incurred for depreciating assets or consumption, often with high interest rates (e.g., credit card debt on impulse purchases, car loans for an overly expensive car).
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Credit Score: A numerical rating reflecting your creditworthiness.
How to:
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Understand the Terms: Before borrowing, know the interest rate, repayment period, and any fees.
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Prioritize High-Interest Debt: If you have multiple debts, focus on paying off the ones with the highest interest rates first.
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Avoid Minimum Payments Only: Paying only the minimum on credit cards can lead to long-term debt and high interest charges.
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Create a Repayment Plan: Incorporate debt repayment into your budget.