Experts often say that debt can only be considered “good” if it’s attached to an appreciating asset. Borrowing money to purchase a home that should rise in value over time is usually considered a smart move, for example. A business loan can also be a net positive provided the funds are used to help you become more profitable over the years.
On the flip side, there are plenty of kinds of debt that just aren’t worth it — especially if the amount you owe is more than you can handle or your interest rate is absurdly high.
If your goal is building wealth and enjoying a life free of financial stress, your best bet is avoiding debts that make getting ahead harder than it has to be. Here are some of the worst offenders.
Student loans can be a net positive for your life if you borrow as little as you can and parlay your degree into a profitable career. And since federal student loans tend to come with low fixed interest rates, student debt doesn’t have to ruin your life.
But what happens if you overpay for school — or if you borrow a ton of money but never graduate?
Far too many students have found out the hard way just how unforgiving student debt can be. For starters, it’s nearly impossible to discharge student loans in bankruptcy, so you’re probably stuck with your student loans until you pay them off — no matter how long it takes.
The high cost of higher education also means students are stuck borrowing more and more for a basic college degree. A report from College Board noted that, on a national level, even a public, four-year degree cost students an average of $21,370 per year for the 2018-19 school year when you add in room and board. That means it costs nearly six figures to earn a Bachelor’s degree — and that’s if you choose an in-state, public school.
If you find yourself struggling with student loan debt, consider looking into alternative payment plans like income-driven plans or refinancing your student loans with a private lender. (See also: Should You Refinance Your Student Loans?)
Credit card debt
Credit card debt is another wealth killer that can make it significantly harder to get ahead in life. Not only is credit card debt unsecured by any sort of asset, but the average credit card interest rate is now over 17%. That means that, no matter what you purchased on your credit card or how unnecessary it was, you could be paying out the nose to carry that debt from year to year.
If you’re struggling with credit card debt, the first thing you should do is stop using credit cards. Then create a plan to pay down debt, possibly using the debt snowball or debt avalanche method. You can also use a balance transfer credit card to secure 0% APR for a limited time, but this strategy only works if you have the discipline to quit using credit cards as a crutch. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)
Payday loan debt
Payday loans are meant to be short-term loans that help you get to the next payday, and they’re mostly targeted at consumers with poor credit. But since they charge high fees and interest rates as high as 400%, these loans can trap you in a situation where you have to get one payday loan after another to pay your bills.
When it comes to payday loans, the best step you can take is to avoid them altogether. If you’re stuck with payday loan debt or in a payday loan cycle that’s hard to break, on the other hand, you’ll have to find a different strategy.
Consider applying for a personal loan for bad credit that can help you pay off your payday loan and stay afloat until your next payday. Your interest rate may be high, but hopefully the pain will only be temporary.
Also, look for ways to cut your spending or earn more money so you can pay off your high-interest loans and keep more of your income for yourself. Sell items you don’t need online, pick up an easy side hustle, or simply cut your bills for a few months, and you might buy enough time to get in a position where you no longer need payday loans just to get by.
According to the most recent report on the State of the Automotive Finance Market from Experian, the average new car payment worked out to $554 during Q1 of 2019 for buyers with all types of credit. Worse, the average new car loan worked out to $32,187 with an average loan term of more than 68 months.
Even if you need a car to get to work, there’s just no excuse to borrow this much — or for so long. This is especially true if you’re not saving enough money each month, you don’t have an emergency fund, or your income isn’t very high.
Remember that cars can easily lose 20% of their value during the first year of ownership. After that, they can lose up to 10% of their initial value for the next four years, according to CarFax. Unfortunately, far too many Americans just trade their cars in at that point, starting the process over again with a huge new loan on a depreciating asset.
You probably need a car to take care of your children and get to work, but you’re better off if you borrow less and pay it off as fast as you can. Consider a used car with a much lower initial price, then choose a shorter repayment term so you can get out of debt faster. And once your car is paid off, keep it forever. (See also: 8 Questions to Ask When Buying a Used Car)