The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.
Debt. It can sound like a dirty word, especially to people plagued by money woes. But, believe it or not, there are times when debt is considered a good thing.
This “good debt” typically involves “borrowing money for an asset that is increasing in value,” Jim Atkinson, a certified financial planner and principal of Columbus Capital, an independent firm in Albany, Ohio, said in an email. “Typically a primary residence or rental properties fit this description. The interest is generally deductible in both cases, lowering the actual cost of borrowing and the underlying asset increases in value over time.”
Other examples of good debt can include student loans (with the return being a higher salary and improved job prospects) or even low-interest lines of credit you take on in order to invest in stocks or retirement funds.
Bad debt — or “stupid debt,” as Atkinson calls it — would involve “borrowing money with no underlying asset.” For instance, “putting the Disney vacation on a credit card, and five years later still making payments when all you have to show are the photos would qualify as ‘stupid debt,'” he said.
Still, it’s important to note that there are times when debt may not be clearly good or bad but simply unavoidable.
“Borrowing money for an asset declining in value but necessary is often the case for many consumers,” Atkinson said. “Few people today pay cash for their automobile — although most would be better off paying cash! — and owning reliable transportation for work and family needs is a part of modern family life.”
And, at the end of the day, whether a debt is good, bad or even neutral is all relative.
“Importantly, the context for the label often depends more on the individual circumstances rather than the type of debt itself,” said Edward Jastrem, director of financial planning at Heritage Financial Services in Westwood, Massachusetts. “For example, residential mortgages are often considered good debt because of the social benefits they provide and tax-deductibility of interest. But an otherwise good mortgage can end up facilitating a series of poor choices: buying more house than one can afford or using home equity in an unsustainable way to fund lifestyle expenses.”
Remember, a debt is a debt, and it’s a good idea to pay down any you’re carrying as quickly as possible. High outstanding balances can do big damage to your credit scores. (You can see where your credit currently stands by viewing two of your credit scores for free each month on Credit.com.) And it can be even harder on your bank account. A person will typically pay $279,002 in interest on credit purchases over the course of their life. (You can calculate the lifetime cost of your debt here.)
Anyone looking to pay down big balances may be able to do so by reviewing their budget for areas where they can cut back, prioritizing payments (most commonly by highest interest rate or lowest balance, though if you’re not sure where to start this credit card payoff calculator can help) and looking into a balance-transfer credit card or debt consolidation loan.
Image: Geber86
May 30, 2023
Managing Debt
September 7, 2021
Managing Debt
December 23, 2020
Managing Debt