Revisiting Good Debt Versus Bad Debt - Page 2
Unfortunately, over the last three years, we’ve come to realize that this “good debt versus bad debt” theory hasn’t held up well in terms of “good debt“ adding to a person’s net worth.
According to the updated Case-Shiller 100-year chart, tracking the inflation-adjusted value of homes over the last 100 years, the current trend is projected to take home values back to where they were in 1985.
The stock market has taken a dive and some major companies have cut their dividends. Many college graduates are carrying loads of student loan debt with no job offer in sight.
It is true that the Fair Isaac Corporation (FICO) scoring model gives bonus points for having a mixture of good and bad debt: e.g., mortgage, car loan, credit card, personal loan and student loan. However, given what we’ve experienced recently, debt isn’t “good” just because it falls under an assumed scenerio. In fact, of late most of our economic assumptions have gone out the window.
The only certainty is that a loan is a debt that has to be paid back. Whatever is purchased with the help of that “good” loan or “bad” loan may go up or down in value over time. Debt is still debt. The trick is to only borrow what you need and what you can afford to pay back.
Ideally, you should save up until you can put a large down payment on a house. Then getting a mortgage allows you to own and live in a nice home where you can easily afford the mortgage payments, insurance and taxes. Additionally, this cost of living compares favorably to what you would pay if you were to rent. The cost of shelter is a basic expense that needs to be paid regardless — like the cost of food or electricity.
Before buying a house or a car, picking a college, or purchasing an investment with borrowed money, plan and save way ahead of time. It is essential to become an educated consumer and understand the worst-case scenerio.
Ask yourself these two questions: What’s the worst that could happen ? Does it make sense to get into big-time debt or are there other ways to get what I need and can afford?
If you don’t like the answers, then don’t bury yourself in debt whether it's “good” or “bad.”