Good Debt vs. Bad Debt

Managing Your Debt

Good Debt vs. Bad Debt

10th May 2007

Some debt is good and some debt is bad. Ever heard someone say that? Coming from a very bad debt situation, at the time I believed all debt was bad. That is because the majority of people only experience bad debt due to bad money management. A friend of mine who is a financial genius decided to explain to me what good debt is and he didn't have to explain what bad debt was, I had already lived through it. In my rather usually skeptical mood I told him to explain anyway. When you have had bad experiences with money especially bad debt, I don't know about you but I've noticed that I become a whole lot more hostile towards discussing money issues. Anyway, below is what Ted told me.

Managing Your Debt His first sentence was some debt is good but most of debt is bad. Since most of us cannot afford to pay for houses cash, a mortgage makes sense. Since we cannot afford to pay for college education in cash, a student loan makes sense. It makes sense to borrow money for these things because we need them.

Borrowing money is not the problem, the problem arises when we let our debt get out of hand usually by overspending which results in falling behind in payments, hence the beginning of bad debt and sleepless nights. According to Ted, avoiding debt totally though it can be done and has worked for few, is actually not too intelligent. Look even businesses take loans, banks themselves take loans, the key lies in how you manage your debt.

The main difference is good debt is usually taken on things we need. Bad debt is taken on things we really don't need but rather are nice to have. Credit card debt is the worst because usually we use our credit cards to pay for things we don't need and can't afford e.g. new pair of earrings, new sound system for the car. Credit card interest rates are usually the highest.

Debt is a choice, a good choice results in good debt, a bad choice results in bad debt. Economic factors such as interest rates, lending rates, inflation affect your personal finance more than you may realize. Making an informed decision is of importance because the ultimate goal should be for your money to work for you.

"If money be not thy servant, it will be thy master." - Francis Bacon

Comments (15):

Collin Says: So much good advice yet we still mess up, what's that about? | 05.10.2007 |

Rachel Says: It is really true that we spend money on things we don't need rather than what we need and then we end up regretting but since when did regret help the problem | 05.10.2007 |

Daniel Says: Nice one. Miseducation is our worst enemy. I believe we are made to believe and experience bad debt as the only debt there is | 05.10.2007 |

Lynn Says: Credit cards are something we need I think. Managing credit cards is the mose difficult thing to do especially when you have a family to take care of | 05.10.2007 |

Ken Says: I have just paid up my credit cards, cancelled four and only have one left | 05.10.2007 |

Mark Says: Congratulations Ken. Some of us still have to get there! | 05.10.2007 |

Ken Says: It ain't a walk in the park but if I can do it, so can you Mark | 05.10.2007 |

Helen Says: Good post. Thanks | 05.10.2007 |

Jason Says: Yes falling behind is the beginning of bad debt that is so true | 05.10.2007 |

Melanie Says: For me it makes sense to get a mortgage yes but I don't think getting a car loan is such a good idea. One can save and buy a car cash | 05.10.2007 |

Russell Says: How many people are really willing to save for two years to get a car cash? I know it's doable but people are not patient | 05.10.2007 |

Curtis Says: This is a good post as most people don't know there's such a thing as good debt and I like the reality check of good choices and bad choices affect debt either good or bad | 05.10.2007 |

Georgenie Says: Loans for anything but business, homes, cars just don't make sense | 05.10.2007 |

Carol Says: Interesting post and it's true the choices are very important | 05.10.2007 |

Paul Says: I really like your blog and your advice. Thanks for this information | 05.10.2007 |

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