The Different types of Debt

Understanding the different types of debt can help you see why it pays to reduce your mortgage.

1.Bad debt is borrowing simply to spend, either on day-to-day things like clothes, or on things that lose value from the day you buy them, like cars and washing machines. This is the typical credit card or car or home appliance finance debt, and it is the worst kind of borrowing.

2.Good debt that can actually fuel personal wealth creation is when you borrow to buy an appreciating asset such as land, real estate or shares. Not only is the asset you buy likely to increase in value over time, but the interest you pay on the loan is tax deductible. So depending on your income and your tax bracket, you could end up borrowing for investment virtually tax-free.

3.Own Home debt is when you borrow money to buy an appreciating asset, but are legally unable to claim any tax rebate on the interest you pay. Home mortgages fall into this category because home mortgage interest is not tax deductible. This is a great pity, because over the lifetime of the mortgage, you will probably pay more than twice the value of the original loan in interest. That is why you should pay your mortgage off as soon as possible to reduce the total interest bill.