The term “Good Debt” sounds like an oxymoron. How can anything be good when you owe money?
The truth is there is both “good debt” and “bad debt.”
In fact, much of the good debt you incur will probably prove to be a solid investment in the future of you and your family. A investment of this type is one that’s likely to increase in value over time and improve your overall financial picture. If it achieves this goal, consider it good debt.
One example is when a member of your family takes out a student loan to pay for a college education. Those with a college degree have been shown to earn more money over their lifetime.
Another good investment is buying a home of your own – the American Dream. To purchase a house, most people have to borrow money by taking out a mortgage. Historically, homes have increased in value year to year, although there have been periods when home prices stayed steady or even declined. Over the long haul, however, home ownership has proved a good investment, so the mortgage you have on yours can be considered good debt.
Now let’s look at “bad debt,” and there’s plenty of it.
When you finance the purchase of items that are used up or you want but can’t afford, that’s bad debt. Some examples are using your credit card to buy new drapes or remodel the bathroom in your new home, or charging an extravagant vacation. You also might go all out by getting a car loan so your neighbors will drool when you pull up in the current year’s fully loaded BMW.
Sure, you want to customize your home so it’s comfortable and up to date, and what’s wrong with enjoying the finer things in life? If you can pay for them, that’s great. But too many people can’t, and they have remorse later when they find themselves unable to pay off their credit card balance – or even come close – and don’t have enough money at the end of the month to meet their car loan payment. In most cases, the credit card debt gets bigger and bigger each month because interest, usually in the 12-14% range, is charged on the balance. And miss a few payments on that BMW and the bank’s tow truck will appear in your driveway to repossess it.
Is there a lesson here? Absolutely. Prepare a monthly budget and stick to it. Don’t buy items that you can’t afford. Follow this advice and you won’t be bogged down by debt that will seem like a 20-pound weight you carry around all day.