Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Comparing Mortgage Vs Credit Card Debt
Alright! Perhaps what we need to do is explore different types of debts because a FICO score model or Vantage point model will be examining every kind of debt much differently.
So when you are thinking about a mortgage vs. a credit card debt, they are definitely not equal. In today’s post, let us compare mortgage vs. credit card debts.
Type of Debts: Good Vs Bad
From a financial perspective, when we are considering the types of debts, some debts are going to be considered as good debts because they have a possibility of gaining returns in the future.
One such good debt is a mortgage. We know that historically the real estate will go up with time. And we know that it is secured by this hard asset called your home.
Another type of loan could be your car loan, which is secured by the car. Whereas, a credit card would often be referred to as bad debt because there is nothing that is guaranteeing that debt.
It is just money that you are borrowing for a very high-interest rate in many cases. This means that there is nothing to back up for the financial loss if for some reason you don’t pay.
So, in short, we now know what is good debt and what is bad debt. When we are talking about good debt, most financial advisors will define this as the type of debt that has the potential to increase your net worth with time.
While a bad debt is best described as any kind of debt that takes away from your overall net worth and will not be adding value to you in any way.
Installment Loans Vs Revolving Balance Debt OR Mortgage Vs Credit Card Debts
Perhaps it is best to distinguish the debts into two distinct categories, one category being ” Installment Loans,” and the second category being ” Revolving Balance.”
Revolving Balance Debt (Credit Card Debts)
When we consider the revolving balance think of it like your credit card debt, the higher the balance becomes, we know that it is not a good thing, especially when we are reaching the upper number for what we were approved.
Let us say that you have been approved for $10,000 for the credit card, and you have utilized $5,000 from that card. You have a credit card utilization rate of 50%. The higher the utilization rate, the more it will drop your credit score.
In fact, as much as 30% of your overall credit score can be calculated from the different types of debts you carry.
With a very watchful eye on your revolving balance and your credit card utilization rate, it is widely accepted that the best practice, if at all possible, is to maintain the credit card utilization rate between 10% and 25%.
Doing so will keep improving your credit score over time and keep your balances low enough so that your score will take a boost.
Moreover, you will also experience the pleasure of having that money in a fall back should you legitimately need to borrow against that credit card. Use your credit cards smartly and be wise with your revolving debts.
It has been proven that consumers with a higher credit card revolving utilization ratio are also at an increased elevated risk of default.
So, if a lender or any other institute that you are thinking of applying for credit from sees that, they are less likely to take you on board.
Installment Loans (Mortgage)
When we are talking about installment loans, it can include a mortgage, a car loan, a personal loan, and a student loan.
Why are credit reporting companies so forgiving and a little bit more generous when helping your credit score increase with on-time consistent payments of installment loan debt like a mortgage? Well, it is considered to be a good debt.
The reason for it to be considered as a good debt is that it has a high potential of increasing the return over time. Let us consider the mortgage debt.
We know that the average real estate appreciation will last many years to come, which is typically about 3% annually.
If you are investing in your education, most of us do this to get a better and higher-paying job.
If you took out a personal loan, maybe you took that for your own business, hence giving you the potential of providing a higher rate of return.
Conclusion
So when it comes to credit card debts that cannot be collateralized. It was essentially just thrown at you with no security going behind you other than your promise to repay.
Now that you are aware of the types of debts, we hope it helps you make a well informed financial decision.
