"When you buy clothes, they're probably worth
less than 50 percent what you pay for them when you walk out the
door," says Bach. "So if you borrowed to pay for them,
that's bad debt."
Not to mention what that debt could potentially do
to your credit rating.
"Total personal debt should not exceed 36 percent
of your total income," says Gelb.
Keeping the debt-to-income ratio in mind, it's also
important not to miss payments.
"Missed payments are trouble," he says.
"A representative of Citibank said if you don't pay within
30 days, they report that to the credit bureaus."
When it comes to buying durable goods that won't contribute
to wealth generation, Bach offers a basic rule of thumb.
"My grandma used to say that if you're going
to buy something that doesn't go up in value, and you can't afford
to pay cash, then you can't afford it."
Exacerbating the bad-debt factor is that people will
apply for store credit for the savings offers that say if you open
a credit card account today, you can take 10 percent to 20 percent
off the cost of your purchase. What people often don't realize is
how much of that savings will be destroyed by the high interest
rate on the card if they fail to pay for the items immediately.
"You can open a store credit card account,"
says Bach, "and what they're not telling you is that after
the first few months, the rate jumps to 20 percent or greater."
Driving into debt
Another bad debt area is auto debt. While most people need an automobile,
and the ultimate cost of an auto is higher than many people can
pay in one lump sum, the way people go about it -- namely, purchasing
more car than they need -- turns it into bad debt.
When is it worth it?
"What we would normally consider bad debt can turn into good
debt in certain circumstances," says Catie Fitzgerald, a personal
finance coach and registered investment adviser in Henderson, Nev.
"If you use debt to buy a car that gets better gas mileage
than your old vehicle, you could end up better off financially."
Bach considers auto debt a Catch-22.
"People borrow to buy cars before homes,"
says Bach, "and that's unfortunate. For most people, their
first major loan is a car loan. That's guaranteed to go down in
value. So you really want to borrow less. For example, instead of
rushing out to borrow to buy a $50,000 BMW, you'd be better off
buying a $25,000 car."
The best type of debt is debt that builds wealth over
the long run, and the No. 1 example of that is mortgage debt.