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Good debt vs bad debt

On Behalf of | Feb 8, 2020 | Credit Card Debt | 0 comments

Is there really such a thing as good debt vs bad debt? It depends on who gets asked. Banks and other lenders might be quick to sell people on the benefits of financing over paying cash. Then, there are some finance gurus who swear by living on absolutely no debt at all, essentially going back to a cash-based economy. In the middle are people who understand that manageable debt plays a positive role and that some debt is actually not so bad.

Credit Karma defines good debt based on how people use the money. Good debt is used to acquire assets and increase income. Some examples of good debt are mortgages, business loans or even student loans. Bad debt is spent on things that are shortlived and that depreciate in value. Credit card debt is almost always bad debt. Money spent on clothes, cars and electronics also tends to fall into this category.

Experian takes a looser approach to defining good vs bad debt. It believes that good debt is something someone can expect to get a continued, lasting benefit from. In this instance, a reasonably priced car might not be considered bad debt. After all, having a car helps people to get to and from work more easily. This opens up more work opportunities versus someone who does not have access to personal transportation.

Experian also points to whether or not the repayment terms are fair and affordable. This is an important distinguishing factor because even traditionally good debt can become bad debt when classed in this way. For instance, there are many people across Kentucky who have underwater mortgages. Owing more on a house than it is worth makes it difficult to benefit from its gradual appreciation.

So, does good debt actually exist? It would appear that it does, but there is no simple black-and-white term to differentiate between good and bad. There is also no doubt that keeping both good and bad debts as low as possible is beneficial to consumers.