The difference between good debt and bad debt can be quite small at times. So small, that we often get confused about what should be classified as good debt and bad debt. Unfortunately for me, I used to think that all debt was bad debt. But then when I started blogging, that view changed considerably.
CNN Money defines good debt and bad debt as follows:
“Good debt includes anything you need but can’t afford to pay for up front without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.”
“Bad debt includes debt you’ve taken on for things you don’t need and can’t afford (that trip to Bora Bora, for instance). The worst form of debt is credit-card debt, since it usually carries the highest interest rates.”
So it seems as though good debt is linked to needs and bad debt is linked to wants. Good debt is anything that appears to create positive value whilst bad debt is anything that can lead to a decrease in value. Money Crashers lists the following examples of good debt and bad debt.
|GOOD DEBT||BAD DEBT|
|Borrowing money for education||Credit card debt|
|Paying for medical care||Borrowing from a 401k|
|Taking out a mortgage on a home||Vacations, jewellery and expensive clothes|
|Purchasing a car||Payday loans|
The fine line between good and bed debt can be seen when the ”bad debt” is used to acquire something good. Let’s use the examples of good and bad debt listed above. Credit cards can be used to pay for education, medical care and business loans. Would they still be categorised as bad debt?
I don’t believe that they can be categorised as bad debt initially. But if you do not pay off the credit card in a timely manner, good debt can easily turn into bad debt with loads of fees and expanding payments. Do you think that is a fair assumption?