Bad Debt vs. Good Debt

Posted By: Dr. Frugal in Credit on 08/21/2007 at 10:51:02

A debt is debt, right· Nope. Ignore for a minute interest rates and focus simply on the quality of the debt and what it is exactly that you are buying.

A good debt might buy you a night class at a community college--a bad debt might be racked up on credit cards for casual expenses that provide no long-term value.

Good debt enhances your quality of life on a permanent level--or at least a long-term basis. In other words, it adds value to your life: a college education is worth millions of dollars in potential future income; a home of your own builds a sense of permanence and equity; a reasonable means of transportation adds functionality your life. All of these "good" debts serve a genuine need. The caveat, of course, is that you can afford to make the payments.

Bad debt finances activities that will likely make life more enjoyable, but which add nothing to its long-term value. That's not to suggest that you don't buy new clothes or hang out with friends; it's that you don't do it by going into debt.

Bad buy buys things that you consume, that lose value, or that go out of style. There is nothing wrong with buying clothes, dinners, beers, and all the other things that make life worth living. The problems when you finance those things with a 21% interest rate.

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