Good Debt and Bad Debt
Almost everybody these days has some sort of debt on their personal balance sheet. There are some who state that debt can be classified into good debts or bad debts. What constitutes a good debt and what constitutes a bad debt? The standard definition for good debt is debt that helps you to make more money, while bad debt is one that makes you poorer.
However, in my personal opinion, there is no such thing as good debt or bad debt. A debt is a debt, which means you owe somebody or some company money. Too much debt is never a good thing, be it good debt or bad debt. Good debt can turn into bad debt overnight. For example, a mortgage loan used to purchase a property which later crashed in value by 40%. Good debt was raised for an investment, but it turned into bad debt because now the house is worth less than the value of the housing loan you owe to the bank.
There are some books which term car loans as one of the bad debts. The financing costs of a car are indeed high, coupled with depreciation of the car and maintenance makes car ownership a very expensive affair. Now, that would be bad debt isn’t it? What if the car is the tool that helps you to make money, it’s a form of transport to get you to various work places. Perhaps the fact that you own a nice car helps to build confidence in your clients so you can close more sales. Would it still be bad debt? Or is it now good debt?
Another example is a credit card. It is often made out to be the worst debt to have, for good reason. The credit card balance left over time incurs the highest interest rate of over 20% per year. A credit card is a great utility for cashless transaction and allows you to enjoy one month of interest free payment if used in a disciplined manner. The reward points and cash back schemes are more incentives to use the credit card as a way of saving money. If you could save 3% for every dollar spent on the credit card, it definitely makes sense to swipe your daily expenses onto the card.Continued on the next page