The good, the bad and the ugly kinds of debt

October 8, 2020

After working for First National Bank and Trust Company for over 34 years, I have helped both individuals and families with questions they have no matter the topic. When families come in with high hopes only to realize they can’t get a loan or the rate they wanted, I’m happy to provide my two cents to help them get on the right track. For example, one year a newly married couple (let’s call them John and Jane) came in with $118,000 in student loans with a monthly payment of $1,100. This couple was eager to start a family and purchase a home, but they knew debt and credit are two things that go hand in hand. Something needed to be done quickly to eliminate their debt and improve their credit if they wanted to achieve financial prosperity in the future.

What does a good credit score look like?

  • 800+ Excellent
  • 740+ Very good
  • 670+ Good
  • 580+ Fair
  • <580 Poor

With good credit in mind, John and Jane established a plan for where they wanted to be in the future, writing down three tangible financial goals for the next five years. Next, they mapped out their debts and established a budget. Knowing they could not pull off $1,100 monthly loan payments with a new graduate salary, they called and renegotiated payments with their lenders. John and Jane made the decision to never miss a payment. The couple even sold one of their cars to help eliminate debt quicker, all with a goal in mind to build good credit.

FICO credit scores can be broken down into five different segments:

  1. Thirty-five percent payment history
    This is the measurement of how well you have paid your debts in the past. Make sure you always pay on time.
  2. Thirty percent amount owed
    This is how much you owe overall in credit right now. It is important to pay off debt as soon as you can.
  3. Ten percent new credit
    This measures how many new lines of credit you have attempted to open recently. Too many new accounts in a short amount of time could be a credit risk.
  4. Fifteen percent length of credit history
    This is the age of your oldest credit account.
  5. Ten percent credit mix
    This portion takes into account the different types of credit accounts you have used, including credit cards, retail accounts, installment loans and mortgage loans.

One might be thinking, debt is a good thing because it helps you build credit. This might be true; however, according to our financial literacy employee, Connie Unruh, there are several different types of debt. Some are better than others, it is important to look at interest rates and know you have the money to always repay the loan on time.

Connie helps us breaks down credit into the following segments:

The good

These are low-interest and typically will have a reasonable amount of time for repayment. Good debt finances appreciating (increasing value) assets or may help improve your future income potential.
  • Mortgage
  • Federal student loans

The bad
These tend to have a high-interest rate and may require something valuable as collateral.

  • Installment loans
  • Private student loans

The ugly
These are extremely high-rate, short-term types of loans that may require you to payback in a week or a month.

  • Pay day loans
  • Car title loans
  • Credit card cash advances
  • Casino loans

Coin toss
These types of credit can have high or low rates depending on the lender and your credit history. These can be great for building credit, but can also be a slippery slope into accumulating more debt.

  • Credit cards
  • Auto loans

Maintaining a healthy credit score is a big part of being financially well. It is recommended you check your credit three times per year by visiting This website pulls credit scores from three different bureaus: Equifax, Experian and TransUnion. Each company uses a slightly different algorithm to compute credit score, so keep in mind this means each score might vary slightly. You are only allowed to pull each of these once a year for free, so pull one every four months to monitor your credit score throughout the year.

John and Jane are still working to pay off debt and are now only left with around $25,000, having paid off $93,000 in a little over 11 years. Within these 11 years, Jane was able to be a stay at home mom and the couple has purchased a first home, sold and bought a second home. The couple is proof that with a well-drafted plan and teamwork, eliminating debt and creating good credit is achievable.

At First National Bank and Trust, we IGNITE PROSPERITY® by helping our clients do more with their money. Whether it’s saving a little extra cash each month or accomplishing a long-term strategy, our goal is to help you transform your financial life. Call and schedule an appointment today, one of our team members would love to help you do more with your money at FNBT. For more information visit or call 217-935-2148. #igniteprosperity