Debt is a concept as intricately intertwined with
America, these days, as baseball, Mom and apple pie.
The amount of personal debt in this country is ever-increasing,
and a large part of the reason is that credit has never been easier
to get. Whereas credit card issuers previously looked for customers
who could repay, today card issuers relish the chance to reel in
those who'll continuously charge beyond their means at 18 percent
or 20 percent.
But debt is a complex concept. Not all of it is good
-- a fact a surprising number of Americans fail to realize until
they're in the hole -- and yet not all of it is bad. When used intelligently,
debt can be of tremendous assistance in building wealth.
One of the secrets, therefore, to being smart with
your money is to differentiate between good debt and bad debt. While
the differences often seem logical, it is a logic that is, apparently,
missed by many Americans.
"When you buy something that goes down in value
immediately, that's bad debt," says David Bach, CEO of Finish
Rich Inc. and author of "The Finish Rich Workbook."
"If it has no potential to increase in value,
that's bad debt."
"Good debt is investment debt that creates value; for example,
student loans, real estate loans, home mortgages and business loans,"
says Eric Gelb, CEO of Gateway Financial Advisors and author of
"Getting Started in Asset Allocation."
Robert D. Manning, a professor of finance at the Rochester
Institute of Technology, also recommends taking on debts that are
tax-deductible and debts that produce more wealth in the long run.
"If you are talking about reducing current debt,
that's where it starts to get nuanced," says Manning. "If
you take a home equity loan because you have 17 percent credit card,
and you go with a 6 percent loan that's tax-deductible, that's good
These general rules of thumb set some clear delineations
-- buying a home or refinancing to get rid of excessively high rates
is usually good debt, as is generating debt to buy high-return stocks,
bonds and other investments.
The concept of bad debt comes in when discussing the purchase of
disposable items or durable goods using high-interest credit cards
and not paying the balance in full.
"The trouble is most people are not organized
enough to retire the entire balance before the due date," says
Every month that you make a partial payment on your
credit account you are charged interest. The disposable or durable
item you purchased continues to lose value, and the amount you paid
for it continues to increase.