Question

1. Good versus Bad Debt. Is there such a thing as good debt, what types of debt do you consider to be "good"? What types do you consider to be "bad"?

2. Are you considered a default risk? How would a lender evaluate you based on "the five C's" of character, capital, capacity, collateral, and conditions? How could you plan to make yourself more attractive to a lender in the future?

3. Some credit cards offer reward points or 1 percent higher cash back reward for all purchases made on the card. How would you feel about using such a card to get those rewards with the intention of paying off the balance each month? Do you have one of these cards now?

Answer 1

1. Yes, There some debts that are considered as Good debts. By definition, Good debts are those that will grow in value upon investment or generate long term income.

For example: Student loans or study loans to pay for A Student's college education. Here we should consider two things. First, A student loan has very low interest rate as compared to any other loans. And secondly, A college education increases your value as an employee thus raises your potential future income.

Another example of good debt will be House mortgage loans. They also have lower interest rates.

Bad debt is debt incurred to purchase things that quickly lose their value and do not generate long-term income. Here it has high interest rate, like credit card debt.

For example: Payday loans, Cash Advance loans (In a payday loan, the borrower writes a personal check to the lender for the amount he wants to borrow, plus a fee. Then he has until his next payday to pay back the loan amount, plus the original fee and any interest incurred over that time period.)

2. Default risk is the chance that companies or individuals won’t be able to make required debt payments. Put it simply, Default risk is the possibility that a borrower will be unable to meet interest and/or principal repayment obligations on a loan agreement. Usually the lenders and investors are exposed to such kind of default risks.

3. Credit cards are good to have as you can use them at the time of need and pay off at the end pf each month when salary is credited. So, I definitely recommend using credit cards.(plus the reward points are received and can be redeemed as well). Currently, I dont have a credit card.