Traditionally, 30-year mortgage loans as well as student loans to pay for a college education
have been considered wise debt. However, in recent years, many consumers have used this wise debt to pay off their consumptive debt, confusing the two types of debt
and extending the time it takes to pay for everyday purchases.
For instance, many people use a home equity line of credit, or HELOC, to pay off credit card debt, assuming that the tax incentives that come with a HELOC makes it a wise decision.
"The sad reality is that the majority of homeowners who do this, upwards of 70 percent, will not adjust their corresponding spending habits and will, within a year or two, charge their credit card balances right back to where they were when they paid them off with the HELOC," says Todd Christensen, director of education at the National Financial Education Center at Debt Reduction Services Inc., in Boise, Idaho.
"Like using a HELOC to pay off consumer debt, using a student loan to pay off credit card debt means that 10 years after graduation, the student will finally pay off the pizzas and music downloads he purchased in college," Christensen says.