Good Debt vs. Bad Debt

Most Americans have some or other kind of debt like college loan, mortgage, and credit cards, etc. As per a report by the Center for Microeconomic Data of the Federal Reserve Bank of New York, the 2018 household debt of Americans is more than $13 trillion!

Debt is typically associated with negative connotations, but we must know that not all debt is considered as bad. It is vital to make the differentiation between bad debt and good debt.

What is Good Debt?

Good debt may sound fantastical to many, but some debts are regarded as good debts. Any kind of debt which assists you in increasing your wealth or in raising your net worth is regarded as good debt.

  • Mortgage: The sub-prime mortgage crisis of 2008 had resulted in huge financial losses. Despite that, mortgage continues to be one of the best kinds of debt. Mortgage not only provides tax benefits, but it also offers the opportunity to purchase a house, which is an investment that generally gains value with time. Owning a house may not be the cup of tea for everyone, but taking out a ‘good debt’ mortgage loan to buy a prospectively appreciating resource is sound financial prudence.
  • Education Loan:It is a generally agreed upon fact that getting higher education (college education) increases the chances of earning more in the job market. There are some kinds of degrees that are more sought after than others, but it is also true that college educated American graduates generally have higher incomes as compared to those with high school degrees. Taking out a large amount of money as student loan at a low interest rate and with lots of time to repay it has an underlying unmistakable advantage, i.e., it can help improve the credit score. Education loans do have the baggage of varied stress-causing issues, but it is typically thought of as good debt.

What is Bad Debt?

If you borrow money to buy something that depreciates in value over time, then it is typically regarded as bad debt.

  • Car loans: The second biggest purchase that we make after a house is a car. It is generally agreed by financial experts that auto loans are bad debt. Cars tend to depreciate in value the moment they are driven away from the dealership. Auto loans may sometimes come with an increased rate of interest. There is not much that can be done about depreciation value of a motor vehicle, but we can reduce the interest by having a good credit score. The credit score of a customer is used for determination of his/her auto loan rate; the interest rate is lower when the credit score is higher.
  • Credit cards debt: The revolving credit of consumers in America is more than $1 trillion and most of it is in the form of credit card debt. One way to reduce “bad debt” credit card debt and bettering our financial health is by opting for credit cards that come with the best rewards and reducing the level of credit card debt.