Good Debt vs. Bad Debt

The amount of personal debt in America is ever-increasing, and a large part of the reason is that credit has never been easier to get. Whereas credit card issuers previously looked for customers who could repay, today card issuers relish the chance to reel in those who’ll continuously charge beyond their means at 18 percent or 20 percent. 

But debt is a complex concept. Not all of it is good — a fact a surprising number of Americans fail to realize until they’re in the hole — and yet not all of it is bad. When used intelligently, debt can be of tremendous assistance in building wealth. 

One of the secrets, therefore, to being smart with your money is to differentiate between good debt and bad debt. While the differences often seem logical, it is a logic that apparently is missed by many Americans. 

Good debt vs. bad debt 

Good Debt 

– Mortgage 

– School Loan 

– Real Estate Loan 

– Business Loan 

Bad Debt 

– Credit card 

– Store credit card 

– Auto loan 

“When you buy something that goes down in value immediately, that’s bad debt. If it has no potential to increase in value, that’s bad debt. 

Good debt 

Good debt is investment debt that creates value; for example, student loans, real estate loans, home mortgages, and business loans. 

 Also, it’s recommended to take on debts that are tax-deductible and debts that produce more wealth in the long run. If you take a home equity loan because you have a 17 percent credit card, and you go with a 6 percent loan that’s tax-deductible, that’s good debt. 

These general rules of thumb set some clear delineations — buying a home or refinancing to get rid of excessively high rates is usually good debt, as is generating debt to buy high-return stocks, bonds and other investments. 

Bad debt 

The concept of bad debt comes in when discussing the purchase of disposable items or durable goods using high-interest credit cards and not paying the balance in full.  

The trouble is most people are not organized enough to retire the entire balance before the due date. 

Every month that you make a partial payment on your credit account you are charged interest. The disposable or durable item you purchased continues to lose value, and the amount you paid for it continues to increase. 

When you buy clothes, they’re probably worth less than 50 percent of what you pay for them when you walk out the door. So if you borrowed to pay for them, that’s bad debt.