|
January 17, 2012
Good Debt vs. Bad Debt
 Being debt free sounds great in theory, but it’s not the reality for most of us.
Still, finance experts say there's a difference between good debt and bad debt.
The average credit card debt per household is more than $15,000. But a recent study shows women are more proactive about paying off debts and increasing savings than men.
So, how to differentiate between good and bad debt?
“Good” debts include mortgages, school loans and financing a car – anything that contributes to a better future or big payoff, according to experts.
“Bad” debts include credit cards, clothing and vacations – any non-essentials you
can’t really afford.
“Debt is only good if you acquire it to pay for an asset you could later sell for more than you originally paid for it,” says financial radio talk show host Nicole Bazemore.
CNN Money reports that monthly long-term debt payments shouldn’t exceed 36 percent of your gross monthly income.
To keep debt from growing, Bankrate suggests treating credit cards like “emergency safety nets” and creating a pay-off plan that eventually brings your debt balance to zero.
We know taking on too much debt is never a good idea. You can track your debts and payments by frequently checking your credit report online – since lenders frequently look at what kind of debt you have.
Bonus PINK Link: Learn how to become debt free faster in our online exclusive.
By Sidmel K. Estes
“Before borrowing money from a friend, decide which you need most.”
American proverb
*Supporting images from FreeDigitalPhotos.net, phanlop88, JMD Photo, and vichie81.
|
Comments
Good debt v Bad Debt
Hi this is a great topic to talk about. Too few people really understand the difference between good debt and bad debt - mostly because we are not taught at school. You make the point that good debt is any borrowing that will result in you being able to sell that asset at a higher value later (paraphrased :) )
I agree and have a slightly easier description good debt is when the item puchased pays for itself without you having to work - even puts surplus cash in your pocket - this would include investments - the best and "safest" in my opinion is property.
A bad debt is one that requires you to work to afford the payments.
In my version a school loan would be a "bad debt" - but I can see how your version implies that through a good education you can increase your personal earning power ....
I think we also need to consider what we want out of life - if we want to have a high paying corporate job then certain qualifications and education pathways are really important. If we want to run our own business or invest in property (for example) like I do then different routes to knowledge and experience need to be sought out.
thanks for sharing
Vicki Wusche
www.ThePropertyMermaid.com
Author of 2 books Using Other People's Money; how to invest in property and
Make More Money From Property; from investor thinking to a business mindset
Car laon I believe is an upside down loan
Is there a way to purchase say a less expensive car with this car, that has a $450.00 per month payment and owe less over all with a smaller monthly car payment?
Car loan I believe is an upside down loan--response
Depending upon how much your current car is valued and what you owe, it may be advantageous to do a trade-in downsize for a lower payment. Check Kelly Blue Book for a close estimate of your current vehicle and compare with your payoff.
Want more financial info check our radio show: http://www.blogtalkradio.com/dropfinancial or follow us on Twitter http://www.twitter.com/dropfinancial
School Debt
How should people set goals/timelines around paying off school debt? It feels like a mortgage, where it's hard to see an impact in making normal monthly payments. Is education something that should be paid off over the natural lifespan?
School Debt--response
It’s good to payoff all debt as soon as possible but depending upon your financial situation, paying down higher interest rate debt first would be a good recommendation. Student loan debt typically holds lower interest rates than credit cards and can be used as a potential tax write offs. Check with your tax professional
Want more financial info check our radio show: http://www.blogtalkradio.com/dropfinancial or follow us on Twitter http://www.twitter.com/dropfinancial
All debt makes the banks more money
There is no such thing as good debt. Now that the housing bubble has busted, even a house can put you in a VERY LARGE hole financially. Add to that a loss of income and that house is now bad debt.
Debt is meant to make the lenders rich ... you work a job to pay a lender, bottonline. The borrower will ALWAYS be a slave to the lender. Why not work a job to put that money away for YOUR benefit (retirement)? Why not work a job to benefit your family (children's college fund)? Why not work a job to save up for a nicer car? When you finance a car, that means you couldn't afford the car in the 1st place.
There is no such thing as good debt.
All debt makes the banks more money
Hi great comment but I personally believe if you think about borrowing differently you will see that some borrowing can actually make you money.
I wrote a book last year called Using other people's money how to invest in property and while based on my experience buying property in England it is a model that is applicable all over the world.
For example I remortgaged my home and took £200,000 and used that money to buy (through mortgages) 7 buy to let investment properties. The rent from the 7 properties paid for their mortgages, letting agent fees and insurance. The profit after those costs was approximately £1,750 per month - thi smonth then paid for the original £200k borrowing, covered any repairs or rental voids and left me with £1,250 per month pure profit.
The bank made their interest and I made a profit - it is possible.
I have also bought a property on a credit card etc
If you understand the maths and know how to invest in property (for example) then it is possible to take a loan from the bank and create a salary for yourself that does not require that you work 5 days a week to earn it!
My website has details of my book if you are interested to learn more :)
Vicki Wusche
www.ThePropertyMermaid.com
Keep a Small Balance?
As I was reading your article, I realized just how much more of a payer-offer I am than my husband. The one thing he has heard though is that it looks good to keep a small balance on your credit card and still just make monthly payments. I, on the other hand, would like the bank statement to say $0.00. Is there any truth to that?!
Keeping a Small Balance?--response
When building credit showing positive activity bodes well, as long as your revolving utilization is low this activity is not necessary on all credit cards. Check out a MyFico.com under the education tab for great additional information.
Want more financial info check our radio show: http://www.blogtalkradio.com/dropfinancial or follow us on Twitter http://www.twitter.com/dropfinancial
Keep a Small Balance?--response
When building credit showing positive activity bodes well, as long as your revolving utilization is low this activity is not necessary on all credit cards. Check out a MyFico.com under the education tab for great additional information.
Want more financial info check our radio show: http://www.blogtalkradio.com/dropfinancial or follow us on Twitter http://www.twitter.com/dropfinancial
Debt
We differentiate by using the terms "obligation" (which is money you owe, but could pay with an underlying asset) and "debt" (which you cannot pay in full).
Good Debt?
“Debt is only good if you acquire it to pay for an asset you could later sell for more than you originally paid for it,”
How is financing a car good debt? I haven't ever sold a car for more than I paid for it.