What is the Difference Between Good Debt and Bad Debt?
For most Americans, the simple truth is that carrying debt is just a part of life. Let’s make things a little clearer by first examining the percentage of Americans within various demographics who have never been in debt. For baby boomers, that percentage is 5.1%. For Generation Xers, the percentage is a little higher, at 8.2%, and for millennial’s that percentage is 11%.
These alarmingly low percentages speak to the overwhelming majority of Americans within those demographics who currently are in debt – and those percentages are staggeringly high – all hovering near 80%. (Baby boomers: 80.9%; Generation Xers: 79.9%; and millennial’s: 81.5%.) On its face, debt is simply borrowing money for the present, at the expense of the future.
Debt certainly has a negative connotation for many, and the above statistics speak to a situation that requires further exploration and invites many questions. Why are so many Americans taking on debt? Is all debt “bad?” Is some debt “good?” Are there, in fact, differences between good and bad debt? Let’s take a closer look.
As a general rule, if a type of debt can help you enhance your earnings potential or net worth, then it can be considered “good” debt. For example, good debt can take the form of student loans (though this has become a subject of recent debate), home mortgages, home equity loans, debt consolidation loans and small business loans.
Borrowing for educational needs is still considered a form of good debt because a college or technical degree generally leads to a greater ease of employment and higher earnings potential. The return on investment over the course of a career makes it easier to pay back student loans, particularly with a degree in the STEM (science, technology, engineering and mathematics) fields.
Mortgages and Other Real Estate Loans
A residential home mortgage is considered a form of good debt because of the straightforward strategy of buying a home and living in it for many years before selling it at a profit. Prior to the bursting of the real estate bubble burst in 2007, median housing prices in the U.S. showed an annual increase of 6.4% from 1968 to 2004.
Following a multi-year period of decline and stagnation, since 2012, U.S. median home prices have been increasing at a similar rate, making home mortgages a form of good debt once again. Meantime, renting out a residential property backed by a mortgage can also generate income, while debt taken out for commercial real estate investments can generate cash flow and capital gains as well.
Finally, low-interest rate home equity loans or lines of credit at reasonably low interest rates can be utilized as a form of debt consolidation to pay off higher interest-rate credit card debt.
Small Business Loans and Debt Consolidation Loans
Small business loans that foster entrepreneurial endeavors are considered a form of good debt in that they can lead to the freedom of not requiring an employer to supply a job and steady paycheck. With a small business loan, the right combination of ambition, brains, hard work and luck can lead to exceptional wealth creation and freedom.
Meantime, debt consolidation loans can be a form of good debt that results in interest expense savings for an individual carrying multiple forms of unsecured high-interest rate debt.
A debt consolidation loan that is issued at a lower overall blended interest rate not only results in considerable interest expense savings over the long-term, but also streamlines the debt repayment process by replacing multiple creditors and monthly payments with one single creditor and payment each month.
The potential drawback, however, is that an irresponsible debtor may simply spend the interest expense savings that result from a debt consolidation loan.
Bad debt can be characterized as debt that cannot lead to an increase in earnings potential or net worth, as well as any debt taken for the purchase of depreciating assets.
The general rule is that if an item can’t appreciate in value, its purchase should not be funded by debt. At the top of that list resides borrowing for the purchase of a new car. Auto loans are a form of bad debt because the value of a new car immediately depreciates as soon as it is driven off of the lot and becomes a “used” car.
Examples of other expensive, quickly depreciating assets include high-end luxury label clothing and large flat-screen televisions. None of these items should ever be paid for by debt. If you don’t have the cash sitting in the bank to buy these items, consider making adjustments. Buying a good quality, pre-owned vehicle in cash is never a bad idea, for example.
Good thrift stores that offer name-brand label clothing for a relative pittance are a viable alternative, as are apps such as OfferUp and Poshmark.
Credit Card Debt
Credit card debt is perhaps the worst form of debt of all, as the high interest rates often associated with credit cards can result in a protracted period of repayment during which interest expense accumulates.
Almost all purchases funded by credit card debt involve consumables that will never appreciate in value, and with few exceptions – such as for the purchase of an online business creation course or similar vocational training – will not lead to an increase in earnings potential.
This is not to say that credit cards are entirely “bad” – when used responsibly they are a highly useful tool for building a credit score and can be a useful budgeting tool. It’s when they are used improperly to fund a lifestyle beyond one’s means that credit cards quickly become a form of bad debt.
Handling my business debt was not something I looked forward to
Handling my business debt was not something I looked forward to. But United Settlement was so patient with my questions and helped me figure out how to handle my debt as a small business owner. I qualified...
I didn't even know what type of interest rates there were and how those affected my debt overall
When I contacted United Settlement, I didn't even know what type of interest rates there were and how those affected my debt overall. So, when I went to go buy a new house, I was shocked to find out that...
Debt settlement is what we signed up for when we were interested in using United Settlement
Debt settlement is what we signed up for when we were interested in using United Settlement. We needed a company to negotiate on our behalf to help us reduce the total amount of debt we owed, and we were...
I had no idea that I could lower my credit card interest rates. But when I contacted United Settlement, they explained to me that I could negotiate my interest rates down lower along with my payoff balance....
If you have ever had an unmanageable amount of credit card debt
If you have ever had an unmanageable amount of credit card debt, you know how ridiculous it is to try to pay it off. In my situation, I did not want to wait until the last moment to get this debt under...
Medical debt is damaging to your long-term credit
Medical debt is damaging to your long-term credit. That is what we were dedicated to managing our debt as soon as we got our medical bills from an unexpected surgery that our insurance did not cover. I...
Finding a good alternative to business debt relief is far from easy
Finding a good alternative to business debt relief is far from easy. As a company, we have spent years trying to find a good solution to our business’ debt, because if we can get it out of the way we...
I had no clue that a debt consulting company could provide guidance
I had no clue that a debt consulting company could provide guidance and what type of loans you should take out. I was thrilled by the communication I had with United Settlement. They did not hesitate to...
Buying a new vehicle should not stress you out to the point that you cry every night to go to sleep
Buying a new vehicle should not stress you out to the point that you cry every night to go to sleep. But that was the point I was at before I contacted United Settlement. These guys were professionals at...
I knew I needed to file bankruptcy before I even contacted the team at United Settlement
I knew I needed to file bankruptcy before I even contacted the team at United Settlement. My biggest issue was how to file and also what type of bankruptcy I should file. A lot of people do not know that...
Who would have thought that auto loan debt can take such a toll on a family
Who would have thought that auto loan debt can take such a toll on a family? Well, we discovered how that could happen when our family bought two new vehicles. We thought we could afford the payments, but...
Why go bankrupt when you do not have to?
Why go bankrupt when you do not have to? That was my thinking when I decided to hire United Settlement. I wanted them to help me get out from underneath my credit card and auto loan debt. They were very...
Who knew that you could get credit card debt relief
Who knew that you could get credit card debt relief just by reaching out to a credit card consolidation company? I did not. But I had a friend recommend United Settlement to help me get through my debt...
We had a revolving credit card debt that just wouldn’t quit
We had a revolving credit card debt that just wouldn’t quit. This in turn made it difficult to try to buy a house. Our credit card debt literally held us back from moving forward in life. But our goal...
There comes a time when you realize you need help with your debt consolidation
There comes a time when you realize you need help with your debt consolidation. And that time came for me last year. I contacted United Settlement to help me manage my debt issues. They were friendly and...
Small business loan debt was crippling our company.
Small business loan debt was crippling our company. We have spent many years building our business, but we had to take out several loans to get through a slow period. Fortunately, those loans helped, but...
If you have ever run a business before, you know how quickly you can get into debt
If you have ever run a business before, you know how quickly you can get into debt. That’s right, you can be trying to live your best life and end up in a situation you cannot get yourself out of. That...
Our credit card interest rates were astronomical
Our credit card debt was not really that bad, but our credit card interest rates were astronomical, which meant we could not get out from under our debt as quickly as we would have liked. We used United...
I had no idea that I would qualify for business debt consolidation loans
I had no idea that I would qualify for business debt consolidation loans. But United Settlement walked me through what that process was like and gave me insight into how to manage my future debt so that...
The last thing I wanted to do is file for business bankruptcy
The last thing I wanted to do is file for business bankruptcy, but that was before I knew how common it was and how little it actually affected my personal credit. United Settlement informed me of that...