Is your debt good or bad? It depends on your entire...

Is your debt good or bad? It depends on your entire financial picture, experts say. Credit: Getty Images/iStockphoto/Andrii Yalanskyi

Are student loans good debt that can open the door to a career or are they an insurmountable burden? Is all credit card debt a sign of reckless spending or can using plastic be a smart way to cover an expense?

No debt is inherently "good" or "bad." What makes it beneficial or hurtful is how it fits into your overall financial picture.

Ask yourself these questions to determine if you're dealing with good or bad debt.

What led to the debt?

The reason you incurred debt can help you determine whether it's helpful or harmful.

"Any debt that is taken on because people don't have any kind of choice means they are starting out in a place of disadvantage," says Ida Rademacher, a vice president of nonprofit think tank Aspen Institute. "That can create a spiral that can prevent people from being resilient."

Conversely, Rademacher says, "the more helpful forms of debt can help people to become more resilient." Student loans, for example, may enable a career that offers a high salary, making you more financially sound.

Think about whether you incurred the debt:

To achieve a long-term goal: Student loans and auto loans can fit in this category. These debts can help you move ahead in life, so long as you don't take on too much.

Out of convenience: These are debts you incur to make other aspects of your life easier, such as when you have a big one-time expense and don't want to deplete your savings. They can be benign if they're helping you manage your overall financial picture.

Due to an emergency: Desperation debt can be dangerous. A need for cash in a hurry can leave you with limited options and result in high interest costs.

Is your debt affordable?

Comparing your debt load with your gross income can be a helpful tool:

Debt load up to 15 percent of income: If you're carrying a moderate credit card balance, paying it off can free up cash and save on interest.

Debt load from 16 percent to 39 percent of income: Debts in this range get increasingly difficult to pay off. You may be able to make them more affordable by reducing interest or payments, such as with a balance transfer credit card or a personal loan.

Debt load of 40 percent or more of income: Debt loads this high can be insurmountable. Use the free consultations offered by many nonprofit credit counselors and bankruptcy attorneys to see if debt relief might be right for you.

Bottom line: Know how your debt compares with your income and use that perspective to understand which approach is the most logical.

The impact on your life

Think about how debt is impacting your life overall, says Thomas Nitzsche, media manager at nonprofit credit counseling agency Money Management International.

Nitzsche advises taking an honest look at your situation and making a plan to resolve debt by focusing on your smallest debts first or by seeking debt relief. "Realize how uncomfortable you are with your debt and that it's in your power to make changes."

Bottom line: Debt doesn't have to rule your life. If you're feeling overwhelmed, take the first steps to resolve your obligations.

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