Debt: An amount of money borrowed from one party to another that usually must be repaid within a certain amount of time. 

Credit: Your ability to take on debt. 

Debt is an issue within low-income communities. One in four black families reported being late with debt payments compared to 15% of white families. Because of this, it is important to note the difference between good debt and bad debt. 

Good debt is debt that you can pay off responsibly based on the loan agreement. Good debt is also an investment that will grow in value or generate long term income. Examples include student debt, home loan debt (mortgages) etc. 

Bad debt is debt that you cannot pay off responsibly. Payday loans and cash advance loans are also bad debt because the lender includes a fee within the debt, and interest rates are very high. Payday loan interest rates start at 391%. Almost any type of debt can turn into bad debt if you don’t have a realistic payment plan. 

Before you go into type of debt for a purchase, ask yourself, is this an investment that will increase in value over time?

Cars depreciate as soon as you drive them off the lot, but many of us need them to get around. It’s important to consider your financial situation and ability to realistically pay off a debt, especially if it is for a purchase that will depreciate in value.

Lastly, try to keep your debt to credit ratio (the difference between how much debt you owe and how much credit you have) as low as possible in order to seem less risky to lenders. This will also help you improve your credit score.