Unless you were born privileged (if so, lucky you) you will at some point have debt. There is good debt, so they say, and bad debt. In my opinion, no debt is “good debt” but some debts are better than others.
For instance, mortgage debt is considered good debt. You are using the loan to purchase an asset that hopefully increases in value over time. Homeowners also get the additional benefit of deducting mortgage interest and property taxes as itemized deductions, at least for now. Most of us don’t have $250,000 laying around to plunk down on a home, so we need to finance the purchase.
Student loans are also considered good debt. There have been many studies that show college graduates, on average, earn approximately twice what non-graduates earn over their lifetime.
Finally, an argument can be made auto loans are good debt. If you don’t have the option of public transportation, borrowing money to purchase a vehicle may be the only way you can get to your job to earn money.
However, in all of the circumstances I just listed above, those good debts can go bad, in a myriad of ways. Too long of financing terms, too high of interest rates, terms that can’t be achieved like balloon payments to name a few. We must know what we owe and how we are going to pay it back even with these “good” debts.
Credit card debt is bad debt. There are very few exceptions to this, one may be that you are using it to start a business. This is obviously high risk, but you know that going in and like borrowing money to buy a house, you are using the debt to finance an asset, the business. You aren’t borrowing to go on vacation or buy a new pair of shoes or golf clubs. So that’s an exception, one of a very few.
The high interest rates associated with credit card debt and the fact most people use this money to purchase consumer type items, not assets, make this bad debt. It is imperative we pay this debt off as soon as possible; doing so is the foundation of having healthy personal finances.
The only guarantee you have in personal finance is the savings you receive when paying off your debt. Let’s pay down that 20% credit card then begin building on your financial future!