Comments on: Good Debt vs. Bad Debt

By: Kristy

Kristy — Thu, 15 May 2008 03:52:24 +0000

You make a great point super saver, about buying more car than you normally would. I’ll add to that by calling out those who are upside down in a car; you’re not in the best financial situation. Usually there are mitigating circumstances involved with that, but it’s still something to avoid if you can. And I HIGHLY recommend that anyone upside down get the maximum insurance they can…load it up with extended warranty’s, GAP, MMP, whatever. Yes, it adds a little more to your loan, but if you total that thing you get a lot less from the value than what you owe. If it ends up being so bad you can’t drive it, you’re still out that money. GAP is important.

By: Super Saver

Super Saver — Mon, 12 May 2008 20:09:39 +0000

Overall, a great starting point. Unfortunately, sometimes the difference between good and bad debt is no longer easily defined by the purpose. Just look at the the subprime mortgage mess and college graduates that are starting out with debilitating student loan debt.

While we payed cash for our current cars, I don’t think car debt is necessarily bad. To me, car loans become bad when they cause me to buy more car than I normally would, because the monthly payment increase is small.

By: in the home stretch…. « Paradigm Shifted

in the home stretch…. « Paradigm Shifted — Mon, 12 May 2008 16:31:25 +0000

[...] a good explanation of good debt vs bad debt (because I don’t think all debt is bad). Possibly related posts: (automatically generated)In [...]

By: Carnival of Personal Finance #152 — Money Under 30

Carnival of Personal Finance #152 — Money Under 30 — Mon, 12 May 2008 13:34:12 +0000

[...] from Master Your Card discusses the differences between good debt and bad debt, FIRE Finance warns about the over limit fees on the Citi CashReturns card, and Feminist Finance [...]

By: Greg

Greg — Sat, 03 May 2008 00:14:31 +0000

With the projected changes of the FICO 08 scoring model, I would hesitate to classify auto financing as “bad debt”. The newer algorithm is said to favor those with a healthy variety in the types of credit they utilize; that is, if your credit history consists solely of, for example, credit card payments, your score is going to be lower than if your report listed accounts for student loans, car loans, mortgages, credit cards, etc.

Note that I am not saying that the new model will favor those with more debt overall, but it will favor those with more variety in the kinds of debt they choose to take on.

Now if you judge auto loans to be “bad debt” because you are paying interest on a loan for a depreciating asset, then you would be correct in labeling it as such (except maybe in cases of hyperinflation, but I’m no economist).

By: Melissa

Melissa — Thu, 01 May 2008 16:51:44 +0000

I think when you are considering the use of credit for something, it’s important to ask the question: Is this the best way to accomplish what I need to accomplish? You may think of viable options without having to pull out the plastic. However, if using credit is your best option, keep this in mind: good debt, used wisely, can be used as a tool to help us get ahead financially. Kristy mentioned the importance of using a credit card to increase your credit rating. If the purpose of the good credit rating is to help you purchase a home, get education, or buy another asset, then the credit card is the tool to help you accomplish this. In this case, the credit card might be considered a good debt. Thanks for bringing that point up, Kristy.

By: Kristy

Kristy — Thu, 01 May 2008 16:42:32 +0000

Paying interest on a hybrid vehicle is tax-deductible in most cases. For those who don’t have any tax deductions available in the form of a house or children, that may be helpful. As a general rule, yes, car loans are considered bad debt; however, in most cases they are a necessity and a way of life. Since many of us can’t do without car loans, the idea is to put the bad debt to good use. Instead of buying a ridiculous gas guzzler like a hummer or other large vehicle, get the hybrid. It’s better for the environment and, like I said, tax-deductible.

By: JB

JB — Thu, 01 May 2008 16:18:14 +0000

@Curt – You’re right. Just because a car is sometimes a necessity (for a first job) doesn’t mean that the debt is good!

By: Curt

Curt — Thu, 01 May 2008 15:47:02 +0000

I disagree with Trent, car debt is always bad, even if it’s necessary in some situations. If you can avoid a car loan, then you should. This is what a saving account is for, so you can borrow against your money rather then someone elses. Just because you need to get a car loan, doesn’t mean you should tell yourself that it’s good debt. A good long-term goal is to get into a financial situation where you no longer need car loans.

By: Kristy

Kristy — Thu, 01 May 2008 14:59:30 +0000

In agreement with Trent, I’ll also add that revolving credit card debt isn’t always bad either. Having your credit cards at 40% capacity and properly managed as opposed to maxed out and poorly managed is good debt – debt that increases your credit rating. Too often people make the assumption that all credit card debt is bad and that simply isn’t the case.