What is the difference between credit and debt?

 

Hey friends! Today I will teach you about the difference between credit and debt. I will also tell you about how avoiding both can better your financial health.

You might think that a credit card can help buy the expensive things that you could not have afforded otherwise. So, why to avoid credit and debt?

There are 2 terms related to debt. Those are good debt and bad debt. I will also explain about them in this post.

In this post, I will also explain why you should not buy anything on credit?

The things I will tell you in this post might look hard, but they are for your betterment only.

What is the meaning of credit?

Credit simply means how much can you borrow. It is decided by banks and financial institutions how much you are allowed to borrow.

Example of credit, suppose you are allowed to do shopping with a $100 loan, then your credit is $100.

Your ability to borrow is also decided by your credit score. So the next question comes, what is a credit score? 

Suppose you have earlier borrowed some money, and you were able to repay it fully, it helps you to improve your credit score. In turn, financial institutions will trust you and will be relieved to provide you with credit.

What if you have no or bad credit score?

In case you have no or bad credit score, financial institutions generally ask for collateral before giving out the loan.

There are two kinds of credit

Secured: where the financial institutions demand collateral, like your property or gold or car etc. for the security purposes

Unsecured: where the financial institutions don't demand collateral but fixed payment every month. Generally the, interest on the unsecured credit is higher than the secured credit. Example of unsecured credit is shopping on your credit card.

What is the definition of debt?

Debt is when you do not pay off your loans. Suppose you have taken a loan of $32,000 from your bank to buy a new home, then you are in debt of $32,000.

Debt are 2 kinds, 

Good debt: I will explain this to you with an example. Suppose you have bought a remote land in a village, say for $9,000. You have taken out the loan from your bank to buy this land. If you are planning to invest on thiinland to open a good industry, then this loan will give you more returns. Such a loan, where returnthe on investment is higher than the loan itself, is called good debt.

Bad debt: Suppose you had bad luck in your investment. You took out the same loan of $9,000. Later, you got to know that the land you bought is a disputed land. Meaning, the same land have been sold twice to 2 different parties.

Why debt is always bad?

Debt is bad because it ceases the peace of your mind. You can not live well keeping debt at your shoulders. There is a good story in the book, 'The richest man in Babylon', where it is written how debt is dangerous for your life and how repaying your debts can bring back honour to your life. 

If debts are bad in the money world, then they are bad in every facet of life. When someone offers you anything then you need to repay it. It is called 'karma'. 

If you don't repay your debt, then nature has its own ways to take out money and that with interest. So why not repay your debts at the earliest. 

So, much of philosophy is spoken. I don't think now you will have a reason to take out debts. 

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