Is There Really Such a Thing as 'Good' Debt?
newsfeedback@fool.com (Maurie Backman)
23 minutes ago
Image source: Getty Images
You'll often hear that debt is bad news, no matter what form it comes in. Racking up a credit card balance could leave you on the hook for a massive amount of interest. And carrying a personal loan or home equity loan balance also means losing money to interest, albeit potentially a smaller percentage than what a credit card might charge.
It's good advice to try to keep your debt to a minimum in general. But you should also know that there is such a thing as good debt, because certain types could help your financial picture improve in the long run.
Good debts versus bad
Some people will tell you that credit card debt is bad news, mortgage debt is a good kind to have, and most other loans fall somewhere in between. The reality is that the good debt versus bad issue is not so black and white.
You might assume a personal loan falls under the category of bad debt. But if a personal loan allows you to take a certification course that leads to a more lucrative career, then that debt was probably worth racking up.
Similarly, you might hear that an auto loan is a type of bad debt, since cars tend to lose value over time rather than gain value. But if having a car makes it so you're able to drive to work and earn money, then it can easily be argued that auto loan debt is a good type to have.
And let's not forget mortgage debt. Many people simply cannot buy a home outright and have to finance that purchase with a mortgage. But over time, home values tend to appreciate.
In fact, according to the St. Louis Fed, during the first quarter of 2020, the median U.S. home sold for $165,300. During the first quarter of 2023, the median home sold for $429,000. So someone who bought a home back in 2020 for $165,300 and sold today might be looking at a profit of around $264,000. It may have taken a mortgage to snag that profit, but clearly, that sort of profit could do a lot for your finances.
Don't get in over your head
It's pretty clear that racking up a $5,000 credit card balance to pay for things like travel and electronics is not ideal. But if you take out a $15,000 home equity loan to improve your living space, is that a poor choice? Not necessarily, if it enhances your quality of life and also adds resale value to your home.
Rather than fixate on whether the debt you're signing up for is good, bad, or somewhere in between, focus on how that debt is going to impact your near-term finances. Will you be able to keep up with your debt payments easily? Will you have to cut back on other expenses to afford those debt payments?
newsfeedback@fool.com (Maurie Backman)
23 minutes ago
Image source: Getty Images
You'll often hear that debt is bad news, no matter what form it comes in. Racking up a credit card balance could leave you on the hook for a massive amount of interest. And carrying a personal loan or home equity loan balance also means losing money to interest, albeit potentially a smaller percentage than what a credit card might charge.
It's good advice to try to keep your debt to a minimum in general. But you should also know that there is such a thing as good debt, because certain types could help your financial picture improve in the long run.
Good debts versus bad
Some people will tell you that credit card debt is bad news, mortgage debt is a good kind to have, and most other loans fall somewhere in between. The reality is that the good debt versus bad issue is not so black and white.
You might assume a personal loan falls under the category of bad debt. But if a personal loan allows you to take a certification course that leads to a more lucrative career, then that debt was probably worth racking up.
Similarly, you might hear that an auto loan is a type of bad debt, since cars tend to lose value over time rather than gain value. But if having a car makes it so you're able to drive to work and earn money, then it can easily be argued that auto loan debt is a good type to have.
And let's not forget mortgage debt. Many people simply cannot buy a home outright and have to finance that purchase with a mortgage. But over time, home values tend to appreciate.
In fact, according to the St. Louis Fed, during the first quarter of 2020, the median U.S. home sold for $165,300. During the first quarter of 2023, the median home sold for $429,000. So someone who bought a home back in 2020 for $165,300 and sold today might be looking at a profit of around $264,000. It may have taken a mortgage to snag that profit, but clearly, that sort of profit could do a lot for your finances.
Don't get in over your head
It's pretty clear that racking up a $5,000 credit card balance to pay for things like travel and electronics is not ideal. But if you take out a $15,000 home equity loan to improve your living space, is that a poor choice? Not necessarily, if it enhances your quality of life and also adds resale value to your home.
Rather than fixate on whether the debt you're signing up for is good, bad, or somewhere in between, focus on how that debt is going to impact your near-term finances. Will you be able to keep up with your debt payments easily? Will you have to cut back on other expenses to afford those debt payments?
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Summary
Debt can be both good and bad, with credit card debt generally considered harmful due to high interest rates. However, certain debts like personal loans or auto loans can improve one's financial picture if they lead to beneficial outcomes, such as career advancement or income-generating