Debt is money you borrow (and still owe) to a bankAn institution, chartered by the state or federal government, that takes deposits and provides credit and other financial services. or other financial institutionBanks (sometimes called commercial banks), credit unions, savings associations, savings and loans. that usually must be paid back with interest. It can be both good and bad.

Good Debt vs. Bad Debt

Good Debt is generally considered “secured debt” and is backed by some form of valued asset, or collateralAn asset such as an automobile or a piece of property that a person uses when taking out a loan, promising to give the asset to the lender if loan payments cannot be met., which means the item you bought on creditThe borrowing capacity of an individual or company. A transaction in which a borrower (or debtor) receives goods, services, or cash and agrees to repay the lender at a future date, usually with certain costs. can be taken away if you fail to make payments on it. Good debt comes from loans you take out to pay for something that will likely gain value in the future, like your college education, or loans you take out to acquire a major appreciating asset (something you own), through a house or condo mortgage, (your home loan). A history of paying Good Debt is directly correlated to a positive credit scoreNumeric value compiled from information in a credit report using a standardized formula that ranks the risk of default according to the person’s credit history. A score is based on past payment history, the amount of credit available, and other factors. .

Bad Debt comes from borrowing money you can’t return, or must pay high finance chargesThe cost of credit, including interest paid by a customer or a consumer for a consumer loan. Under the Truth in Lending Act, the finance charge must be disclosed to the customer in writing. to obtain. This debt accumulates on items purchased on “unsecured credit,” that are not tied to anything you own. Bad debt includes credit card debt, loans from family or friends or high priced neighborhood “loan sharks”, and even auto loans, because cars as an asset are unlikely to gain in value.

While understanding good vs. bad debt is important, it is also extremely important to realize that good debt, if unpaid, or delinquent, can be the most expensive to pay back. Defaulting on good debts can have the most dramatic negative effect on your credit history and credit score.

Certain debts are legal debt obligations that if unpaid, can lead to wage garnishments, (your paychecks are automatically deducted to cover your legal debts), and the withholding of income tax returns. One such debt is student loans. Student loans, while not secured by a physical asset, are guaranteed by the government and are not dischargeable in bankruptcy. For this reason student loans should be prioritized above other unsecured debts. Not paying such debts can lead to major legal battles, not to mention major negative consequences on your credit history and credit score. Other such legal debt obligations include child support, alimony, medical debt, and taxes owed to the IRS.

It is important to have a good mix of debt, including some unsecured credit card debt as well as larger good secured debts, in order to optimize your credit score. (Please review the section on Credit Scores for more information).

Options for Credit Repair

  • Watch your spending
  • Pay your creditors on time
  • Contact creditors and credit counseling agencies to work out repayment option
  • Increase income and use it only to repay your debt
  • File for bankruptcy and start all over

Think about the costs and benefits of the solutions presented? How do goals and values influence your decision on how to get out of debt and repair your credit?

Repairing Your Credit

Repairing your report involves both correcting inaccuracies and really fixing the way you manage your financial life. Take a preventive approach: watch spending and credit debt so problems don’t happen. Budget carefully so that you can pay your debts each month. Remember to pay on time and try to pay more than your minimum payments on credit cards. You may need to increase your income to do this; use wages from overtime or a second job to repay your debt only.

Contact creditorThe lender or supplier of money, goods, services, or securities; A person or organization which extends credit or lends money to others. s directly, explain your situation, and ask for reduced payment options. You should also contact a credit counseling agency. A credit counselor can help manage debt by consolidating loans, sometimes at a more favorable interest rate and over a longer repayment period. Counseling will not hurt your credit score. Credit counselors are sometimes known as budget planners and they are ideally vetted and approved by your state. In NY state, for example, a list of approved agencies are found here.

Be wary of potential credit repairProcess of re-building one’s credit status in order to restore eligibility for secured loans. scams and fraud related to 3rd party debt agencies, especially in these economic times. Do some of their claims sound too good to be true? Probably because they are. Before you contact any credit repair company, find out if they are legitimate through the Better Business Bureau.

Try contacting a local non-profit agency instead. One example is the nonprofit National Foundation for Credit CounselingThe NFCC is the parent organization for more than 100 nonprofit member agencies and 900 local offices that comprise this network. These agencies help consumers establish budgets and negotiate payment plans with creditors. (NFCC). They have agencies with local offices across the United States. The agencies are called Consumer Credit Counseling ServiceThe CCCS is a nonprofit agency that assists people with budgeting, financial management, and payment arrangements to creditors. CCCS agencies operate under the National Foundation for Credit Counseling — the parent organization. (CCCS). They assist people (for free or at a very low cost) to budget, manage financial problems, and help negotiate with creditors. They also develop debt repayment plans — offering an alternative if you are considering bankruptcy proceedings.


It’s possible your consumer debt has become a major ongoing issue and you cannot manage your debt effectively. If all other avenues have been discussed and exhausted with your family and professionals like attorneys, accountants and financial counselors, then bankruptcy might be an avenue for you to consider. Bankruptcy, however, has major long term negative consequences, and cannot be considered lightly. For more information on Bankruptcy, continue on to the next section.