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  1. #1

    Good Debt vs Bad Debt

    Is there such thing as “good debt” or “bad debt”? Many people who have paid off a large amount of debt would probably tell you there’s no such thing as good debt. But some types of debt are considered “good debt” based on their value proposition.

    Good Debt

    Generally, good debt is debt that is accumulated in purchasing something that will increase in value or yield a profit.

    1. Mortgage debt. Mortgages are considered good debt because property values usually appreciate with time. You can also rent out your home or a portion of your home to make money. Choosing a home with affordable payments and a low fixed interest rate and having a 20% down payment are important factors to consider when purchasing a home. If you can’t afford the monthly payments, a “good debt” could quickly turn into a debt nightmare.

    2. Student loan debt. Statistically, college graduates make a higher salary than high school graduates. So borrowing a reasonable amount of student debt to obtain your degree is considered a good investment in your future earning potential. Just be careful to borrow money in proportion to the salary you’ll be making when you finish school.

    3. No debt. The best type of “good debt” is not having any debt at all. Most people have experienced the stress and frustration of having debt at one point in their lives. Avoid the stress completely by not borrowing money and becoming and staying debt-free.

    Bad Debt

    Typically, debt is considered a “bad debt” if the value of the item you’re purchasing will decrease over time and/or the money you borrowed is for a non-necessity.

    1. Vehicle debt. Vehicle loans are generally considered bad debt because a car’s values depreciate rapidly. When you pay $30,000 for a brand new car, the value of the car decreases significantly the moment you drive it off the lot. You still owe the $30,000, but the car won't be worth that amount when you sell it.

    2. Credit card debt. Most people know that credit card debt is bad debt because of the high interest rates. Credit cards used sparingly and/or paid off in full at the end of the month aren’t a bad idea. But most people don’t use credit cards in that fashion and end up getting in debt over their heads. With interest rates of 20% and higher, credit card debt for consumer goods should be avoided when possible.



    3. Payday loans. Better known as the robber of the working class. Extreme interest rates for individuals who are already in financial distress make payday loans one of the worst forms of bad debt. Avoid them at all costs.

    Things to Keep in Mind

    1. Obviously there are exceptions to the “rule” and you should carefully consider your own financial situation before taking on new debt. What might be a “good debt” for you could be a “bad debt” for someone else. The key to borrowing money is obviously: borrow in moderation.

    2. Debt itself isn’t necessarily good or bad, but the way you pay back the debt can impact your credit score and the interest rates you’re eligible for. Specifically, the timeliness of your payments (not paying your bills late), percentage of available credit to debt (not maxing yourself out) and total amount owed (not too high in comparison to your income) are all important factors to take into consideration.

  2. Good Debt vs Bad Debt
  3. #2
    Vehicle debt is definitely bad debt. There are people who will tell you that your vehicle is an asset - sorry but it is not, regardless of how long you plan to keep it. If you are going to finance a car - I recommend finding something that is coming off a two or three year lease. Although the overall value of the car will still depreciate, the rate of depreciation decreases with age. If you buy a $50,000 BMW new, it is going to be worth around $26,000 after three years. However after six years it may still be worth $17,000 - same period of time but less value lost.

  4. #3
    Payday loans offered through indian reservations with unbelievably high interest rates - definitely bad debt and part of me wonders how these are still legal?
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  5. #4
    Quote Originally Posted by Frugal Mom View Post
    Payday loans offered through indian reservations with unbelievably high interest rates - definitely bad debt and part of me wonders how these are still legal?
    I agree, they are so predatory. I guess the government thinks it's an individual's decision whether he/she chooses to use them or not.

  6. #5
    Registered User Junior Member
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    25
    Refund Anticipation Loans (RALs) for tax refunds are also bad debt. Although they are typically paid back within 21 (per the IRS issuing the refund as prepared). There are a LOT of people out there that filed with H&R Block that had refunds delayed (and it WAS in fact H&R's fault despite whatever H&R employees will say) due to claiming education credits, and took out the RAL expecting to pay the minimum finance charge (as 99% of RALs end up doing) but ending up actually financing a real loan for over a month at an assinine interest rate. I work as a tax preparer, and our state did not approve these loans to be issued, but last year, I wanted to smack anyone who took one out because they couldn't wait that extra 5 days for their refund (last year the IRS was pretty fast most the time, compared to this year).

    Also, I have to contest student loans as "good debt". Unless you have a very specific career, I mean, successfull career or job opportunities to obtain after getting a degree, then student loans are just a gamble. All these idiots taking out loans for degrees in liberal arts majors are just that, idiots. And the loans are definately bad debt. Just because the stats say you'll make more with a BS/BA or masters, doesn't mean getting a master in History or Political Science or a PhD in Anthropology is a good idea. Those are the degrees that will leave you crying about being an unemployed victim burried under unfair loan payments. Same with taking out loans to attend a ridiculous private school when a state school might do the job for far, far less.

    Mortgage debt is only good under the strict guidelines you suggested, with "affordable" being the biggest key word there. Even an affordable mortgage can be bad debt for a while if it empties your emergency fund due to closing costs or other costs needed to be paid in cash.

  7. #6
    Registered User Enthusiast
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    64
    Quote Originally Posted by Frov View Post
    Also, I have to contest student loans as "good debt". Unless you have a very specific career, I mean, successfull career or job opportunities to obtain after getting a degree, then student loans are just a gamble. All these idiots taking out loans for degrees in liberal arts majors are just that, idiots. And the loans are definately bad debt.
    I am one of those idiots, unfortunately. I definitely agree now that student loan debt is bad debt. I wish I'd known that before I went to school as the debt I got myself into hasn't done me much good.

  8. #7
    Registered User Enthusiast
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    69
    I have a lot of credit card debt and its bad debt for sure! I wish I'd never even signed up for my first credit card.

  9. #8
    Quote Originally Posted by AnnaR View Post
    I have a lot of credit card debt and its bad debt for sure! I wish I'd never even signed up for my first credit card.
    Unfortunately you're in the same "boat" as a lot of people. Hang in there thought. With dedication and perseverance you can pay them off!

  10. #9
    Registered User Enthusiast
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    64
    A lot of people are in debt and its really sad. I wish I wasn't one of them.

  11. #10
    Registered User Enthusiast
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    69
    Quote Originally Posted by DebtSurvivor View Post
    Unfortunately you're in the same "boat" as a lot of people. Hang in there thought. With dedication and perseverance you can pay them off!
    Thanks. I'm trying really hard now. It wouldn't been so much easier to just not buy so much junk in the first place but its too late now.

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