Did I scare anyone off yesterday with my soapbox? I hope not. :) Today we’re going to narrow in on different kinds of debt. Good debt vs. bad debt — what’s the difference? Aren’t all debts created equally? Well… not necessarily. Debt overall is bad to have, but there are some “good debts” that are unavoidable.
Here’s a little graphic to explain the difference:
- Student Loans: College is expensive! But having a college degree, in my opinion, is definitely worth the cost. Student loans are considered good debt because of the value an education will provide in the long run.
- Home Mortgage: When was the last time you heard of someone buying a house in cash? Mortgages are categorized as good debt because you eventually gain equity on your home with the hope that you will turn a profit when you sell.
- Business Loan: Starting a business can be very expensive at first with a lot of upfront costs involved. A business loan provides the freedom to start the business with the back-up dollars to help keep it afloat in the first few years. The goal is that eventually the business will turn a profit and the loan can be easily paid off within five years of the start (give or take, depending on the business).
- Car Loans: Financing a car isn’t bad per say, but it is considered a bad debt because the car that you continue to pay interest on each month is rapidly depreciating every day you drive it. According to Edmunds, the minute you drive your new car off the lot, the value drops by about 20%. It is better to save up for a new used car than to finance a brand new car. (Note: Sometimes, you just can’t afford a car. J and I bought a new used car last year and ended up financing it because we needed one reliable car between us. We didn’t want to keep the debt on our records, though, so we ended up paying it off in 6 months. Read more here.)
- Credit Card Debt: Ahh the credit card. The seemingly “free money” that supports our lavish lifestyles. Credit card debt is bad because of the high interest and payment schedules arranged to maximize the costs for the consumer. We’re going to dive into credit cards more on Thursday. :)
- Store Credit Card Debt: It seems every department store I go into asks me if I want to open up a credit card. While it may seem like a good deal that day, beware that most store cards tend to have APRs of 20% or more, which will offset any money that you may save on your discounts. Avoid store credit card debt, above all else!
Now, keep in mind for each of these categories there may be exceptions. :)
What other debt am I missing? Have you ever considered your debt in terms of good or bad?
This is day 16 of a 31 Day series on Financial Freedom. Click here to see all of the posts.