Good debt vs. Bad debt
In an article by Carlo Dellaverson, Dellaverson mentions that an important part of personal finance is sustainability. An important part of sustainable wealth is knowing the difference between good debt and bad debt. The difference between good debt and bad debt is that good debt works to help build your money and investments. Good debts includes the right mortgages and student loans. Bad debt on the other hand, keeps you away from the abilty to grow your personal wealth. Bad debts can include mortgages a buyer can not afford.
There are four debts that are mentioned in the article which will be described and labeled as either good or bad debt based on my analysis. Installment debt is a statistically less risky form of debt and is usually secured by a an asset. This means that the asset can be lost with multiple missed payments.
Revolving debt comes from credit cards and is different from installment debt in that you pay a different amount based on a changing balance. This can be riskier because revolving debt tends to come with higher interest rates and can be very dangerous if one does not monitor their spending.
Student loans debt is considered to be a form of installment debt but is treated differently. This is because one can defer their student loans and not be negatively impacted. In other words, deferring your student loans will not hurt your credit score.
A HELOC is a hybrid between installment and revolving debt. HELOCs are usually sevcured by property but acts as credit that is tied to the piece of property. HELOCs have adjustable rates therefore, the Fed’s actions on interest rates can directly affect the payments made on the debt.
In conclusion, installment debts will usually be seen as good debt because it will help build ones money while revolving debt can hurt ones sustainability. However, it can also be argued that with proper money management and a solid finiancial plan, any smart debt, whether installment or revolving can be seen as good debt.
By: Jason Hong
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I agree with the existence of seemingly “good” and “bad” debt. I feel, however, that debt should not be classified as good or bad simply based on its type, that is revolving debt, installment loans, etc. Generally, I think that a debt can be either good or bad based on the needs of the products or services purchased by the consumer and the conditions of their purchase, on the financial solvency and liquidity of the consumer, and more so based on the alternative financing options available to the consumer. For example, I would classify bad debt as spliting the enitre purchase price of a vehicle over several credit cards, but using credit cards for small to medium purchases that can be paid off over time or in emergency situations can be “good” debt.
Generally though, the idea of the article is sound; consumers should be aware of their debts and how “good” or “bad” they acctually are.
charlesthomas87 - November 11, 2008 at 7:19 pm