Lesson 1 of 4 · 7 min read
Good credit vs. bad credit, and what DAE is
Not every debt is a problem. See how to tell credit that helps you from credit that costs you, and why DAE is the figure that really counts.
A “good” loan usually finances something that raises your net worth or your earning power in the long term: a reasonable mortgage for a home you would live in anyway and that you pay for instead of rent, or a loan for education that raises your potential salary. A “bad” loan finances spending that loses value immediately: a holiday on credit, electronics bought on high-interest instalments, a personal loan with no clear purpose.
The distinction isn't absolute: a mortgage that is too big for your income becomes “bad” whatever its purpose. The useful question: “Does this loan raise my net worth in the long term, or does it just put off paying for immediate consumption?”
DAE: the figure that counts
DAE (the effective annual rate) includes ALL the costs of the loan (interest, arrangement fees, management fees, any compulsory insurance) expressed as a single annual percentage. Two loans with the same advertised “interest rate” can have very different DAE, because of fees hidden in the structure of the offer.
Always compare DAE, not the nominal rate
The law requires every lender in Romania to show the DAE. If an offer looks great on “interest” but you can't easily find the DAE clearly displayed, that is a warning sign.
In short
- “Good” credit = supports value or income in the long term; “bad” credit = finances immediate consumption that loses value.
- DAE includes all costs, not just the interest: it is the right yardstick for comparison.
- The distinction also depends on proportion (even a “good” loan becomes risky if it is too big for your income).