The good, the bad and the ugly kinds of debt

December 1, 2014

What are the good types of debt, and which ones should you avoid?

The good, the bad and the ugly kinds of debt

Almost everyone carries some kind of debt, from paying for dinner on a credit card all the way up to national debts that run trillions of dollars.

We generally tend to think of debt as something to be avoided. But in fact, economists and financial planners consider some types of debt to be good. There are debts that can help you get ahead, and other debts that can endanger your prosperity.

The good

Some debts can be very beneficial in the long term, within reason. Banks and financial planners generally consider mortgages and education loans to be the desirable kinds of debt. This is because they are investments in your future. There's a high return on these debts if they're managed carefully and you stay within your budget.

Mortgages are good because over time you build equity in your home and can actually come out ahead. Education loans are good because your lifetime earning potential goes way up with a solid education. In both cases, you're borrowing money now in order to make even more money later.

The bad

As a rule, you don't want to carry around much credit card debt. The interest rates are very high, and credit cards are generally used for non-essential purchases. You don't pay for a house or an education on your credit card.

But credit cards are not a bad thing. Most people use them, and if paid off regularly they can be a fantastic way to pay for everyday purchases and build a good credit score over time.

Of course that hinges on being able to pay them off regularly and keep the totals low. The irony here is that you should generally only use credit cards when you don't actually need to use them.

Lines of credit are similar, but often even better, as they can have lower interest rates. Lines of credit can be used to pay for business costs and other things that will ultimately put you in better place for the future.

The ugly

Some debts, like payday loans, consumer loans and the like, are best avoided outright if at all possible. Any kind of high-interest, short-term loan is something to be reserved for an absolute emergency. If you're already tight on cash and you borrow money to buy something, you can get into a debt cycle that's very hard to stop.

The material on this website is provided for entertainment, informational and educational purposes only and should never act as a substitute to the advice of an applicable professional. Use of this website is subject to our terms of use and privacy policy.
Close menu