Comparing Good and Bad DebtDo you have any outstanding debt? If you do, how would you rank your debt? Do you consider to have good debt or bad debt? The reason that I ask this question is because there are many different kids of debt. You can have a high interest credit card that’s just hurting your wallet at the moment. You can also have a student line of credit that you’re paying interest on while you plan for your other financial goals in life.

Let’s get our discussion comparing different kinds of debt started:

Does “good debt” even exist?

This is an arguable point of view. There are generally two common schools of thought to this idea of supposed good debt. One school of thinking is that all debt is bad debt. Then there’s the other school of thought that understands that there will be many times where you need to acquire debt for a positive cause. I personally think that all debt sucks, from a home mortgage to a student line of credit. With that being said, if you know what you’re doing, you can use debt as leverage and use it to reach the next level.

You can reach the next level by acquiring debt to attend a college that you likely could never afford. If your parents can’t help you, you have your heart set on a specific post-secondary school, and there’s little funding, you’re going to likely need to use student loans. You can also use debt to finance your new business. You can use debt as leverage here by simply growing your business, and then paying the money back once you have the cash flow that you aimed for. Essentially, debt is never good but it can be used for good reasons. The definition of good various from situation to situation.

Should you promptly pay off “good debt?”

Should one be in a hurry to pay off debt if its considered to be good? There are many sides that this argument can sway towards. If you run a line of credit calculator you might find that it makes more sense for you financially at the moment to begin saving for retirement because you’ll have compound interest on your side for many years. My stance on paying off good debt is that you need to have a plan in place for when you’ll pay it off. If you’re using the debt to finance your new business, you obviously can’t pay the money back right away. The same goes for a student line of credit. If you’re still in college or you’re looking for a job, it won’t make sense to pay it back. At the end of the day you need to have a plan in place for repayment.

Will “bad debt” ruin your financial picture?

How negative of an impact does bad debt have? The implications of high interest credit card debt can stretch pretty far. If you avoid the solutions to credit card debt, your financial picture may not look so great. The problem is that it can affect your credit score due to late payments, having too much money that you owe, and it might be difficult in general to convince someone to loan you money. Especially since your credit score will eventually suffer from your spending habits. You can also get a free credit score without credit card. If you don’t work towards paying off your bad debt, it can really affect your  financial situation. This is why we often stress at this very blog that you need to do everything possible to eliminate your credit card debt.

What are the main differences between both types of debt?

What it comes down is how are you benefiting from the debt? With student loans you benefit because you obtain an education that your normally couldn’t afford. You can in turn use this education to find a job that you couldn’t get without your education. What happens is that you borrow money to increase your income throughout your life.

When it comes to high interest credit card debt you don’t benefit at all. You likely spent the money on something that you don’t need. Then this debt comes back to haunt you down the road.

That concludes our discussion on good debt and bad debt. What’s your stance? Do you believe in good debt? Do you think that bad debt can hurt your financial situation completely?

(photo credit: assuroca)