Talk show host and debt guru Dave Ramsey says that there is no such thing as good debt. He constantly tells his audience that all debt is bad debt. But, many other financial experts feel that there is such a thing as good debt when used in the right way for a few select purchases. So, what constitutes good debt and bad debt?
Most Debt Is Bad Debt
Most people agree that bad debt is anything that you pay for with credit that depreciates in value. So, for example, if you bought a brand new 60 inch television set on a credit card for $1,500, it is immediately worth less than that $1,500 as soon as you take it out of the store’s doors where you bought it. The same is true of your car. We all have heard how much a car depreciates as soon as you drive it off of the car lot. Items that depreciate in value are routinely considered bad debt. Bad debt has the potential to hurt your credit score if not monitored properly or if it is abused.
Good Debt Increases Your Net Worth
Many financial planners and expert say that there are some instances where purchases made with taking on new debt can be classified as good debt. Good debt can be directly tied to an asset or an expense that will increase your net worth. For example, buying a house with a mortgage is considered a good use of debt because in most cases the asset appreciates at the rate of inflation in most areas of the country. While the housing crisis of the recent few years have shown that housing prices do not rise in perpetuity, real estate is still considered a good investment with the appropriate use of debt which is normally considered good debt. Another example of good debt is investing in education. One caveat that should be addressed is those individuals taking on large amounts student loan debt from private colleges or while studying majors that do not have an adequate payoff for the amount of debt. A doctor or lawyer who takes on student loan debt can justify the use of this good debt in most cases because the payoff at the end of the college degree is high. But, an art history major who takes on massive student debt from a prestigious private liberal arts college, for example, will most likely not see a recoupment of the investment.
Everyone has to make their own determination if there is indeed such a thing as good debt. Many people fool themselves into thinking that they are taking on good debt in order to feel better about the debt accumulation. Serious consideration must be made before a person takes on too much debt, whether good debt or bad. There is quickly the potential for it to get out of control if the borrower is not careful.
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