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Are the Phrases “Good Debt” or “Bad Debt” Justified?

Today’s post is contributed by Amy Nickson, a passionate writer on finance. Amy is a professional blogger who has started her own blog and also works as a contributor for the Oak View Law Group. Please share your opinions by commenting below.

Are the Phrases “Good Debt” or “Bad Debt” Justified?

The word “debt”’ has a negative connotation. People who are in debt know how painful they are. It costs your hard-earned money and hinders you from achieving financial goals like saving and investing. In addition to this, carrying huge debts may keep you under stress that can take a toll on your personal health and relationship.

However, some people believe that debt is now a fact of life. Incurring debt is now the only way you can pay for the big-ticket items. They say sometimes accumulating debt is considered a good thing.

Jim Atkinson, a certified financial planner and principal of Columbus Capital has said, “A ‘good debt’ typically involves borrowing money for an asset that is increasing in value.”

Taking out a home loan, student loan, small business loans are all considered good debts.

Why is taking out a home loan considered a good debt? It’s because the interest rate is tax-deductible and the asset increases in value with time.

On the other hand, planning a vacation on a credit card, taking out payday loans, buying a car using a loan, are all examples of bad debts.

However, some financial experts are of the view that debt is debt; there is no such thing as “good debt”.

These experts say the “Good debt” concept is a marketing gimmick made by the banks and lending institutions to force people to think borrowing money is a normal thing.

People are actually making the ‘easier wrong’ instead of ‘harder right’ financial decision.

Some financial experts have further said that people can avoid debt while buying big-ticket items like a home, a car, or higher education.

They just need to be financially disciplined and they should be aware of the proper financial strategies to achieve their financial goals.

How can you avoid a home loan and still purchase a house?

Without taking out a home loan, people would never be able to purchase a home is a wrong concept. People can actually get a house without incurring debts.

How?

According to some financial experts, a person should consider renting to save up enough money. By doing so, the person can buy a home with cash.

Obviously, it will take a longer time to buy a home, but it can be possible if that person sticks to the plan and works hard to build up their savings.

How can student loan debt be avoided?

It is still possible that a student can get a college degree without incurring student loans. However, for this, their parents should have taken the initiative soon after the child was born.

Parents should open a 529 college savings account as soon as possible to help the child get his/her college degree smoothly.

A 529 college savings plan is a tax-advantaged plan that helps families to set aside funds for their child’s future higher education costs.

However, a student who doesn’t get the financial support from the parents can also avoid student loan debt.

There are some ways:

  • The student can work in the school as a volunteer to earn money to pay for room and tuition.
  • Doing part-time jobs can help students to earn money to fund the living costs.
  • Some Govt. and non-profit scholarships and grants that encourage good students to complete their studies as well.

How can credit card debt be avoided?

We all know that some consumer debts like credit card debt, payday loan debt, auto loans are unsecured debts. The worst of the bunch are payday loans. One should not take out payday loans as they come with ridiculously higher interest rate and most of the payday lenders prey on people in financial troubles. If you don’t repay them, you will fall into the vicious debt cycle.

Well, you are free to use your credit cards for your necessity but make sure you pay off the balance every month. Also, you shouldn’t cross the credit limit of your card.

By doing so you can easily avoid painful credit card debts.

An auto loan can also be avoided. You just need to save as much as possible or entire amount before you buy the car. Also, avoid buying multiple cars as they are money suckers and will lose your hard earned money on their upkeep. If money is very tight it’s better to just have a single car, if possible.

What if you have already in credit card debt?

Here are some smart tricks that you should follow to stay out of the debt cycle.

  • Review your monthly income and formulate a budget so that you’re able to make your monthly payments on time.
  • Once you formulate a budget, you will be able to set aside some dollars. Then you can make some extra credit card debt payments. Thus, you can get out of debt sooner.
  • If the debt is huge, try to convince your creditors that you’re truly working hard and saving money to repay the outstanding balance. They may agree to reduce the interest rates on your credit cards or wipe out a part of your credit balance.
  • If you’re still unable to manage your obligations, you can approach a credit counseling agency. They will analyze your income and may offer you a debt repayment plan according to your financial ability.
  • To avoid further debts, you have to stop living an extravagant life. Try to save as much money as you can. The more money you save and pay toward your debts, the sooner you can get out of it.

What about the interest deduction on your taxes?

You can say that you will lose the mortgage interest and student loan interest deductions. Yes, to some extent they are beneficial, but the benefits are good as long as the amount that a borrower can increase the deductions beyond the standard deduction.

In addition to this, after a certain income level, a student loan borrower will not get the benefit anymore.

In Conclusion

Thus, we can say that “there is no debt which is beneficial”. Borrowing money is an easy option for people to get an item quickly. You can take out a loan for buying a home instead of saving for years upon years. On the other hand, if you are able to keep your job and save money, then also you can buy a home without taking out a loan.

So, don’t be fooled by the concept of “bad debt”, “worse debt”, “good debt”, and “stupid debt”.

You are allowed to borrow only when you are sure that you can pay off it within the stipulated time.

If you take out the so-called good debt “home loan” and miss the monthly mortgage payments, then very soon you will lose your home.

Similarly, if you purchase things using a credit card, which is known as “bad debt,” and pay off the entire balance within the time you will not fall into financial trouble. The add-on benefit is being a good credit user, your credit history will improve over time.

Therefore, it is all about how you deal with your debt. Borrowing is ok, but borrowing too much and not paying back the money is a disaster that will absolutely ruin you.

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10 comments

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  1. Mr Defined Sight

    Truth be told, I hate all debt. Mortgages are the one thing I can stomach a little easier but I still don’t care for it. It does help to get a little tax break I guess. I make it a priority to pay things off pronto. If I can’t afford it immediately, then I can’t afford it period. Too many people fall into the trap of “what can I afford monthly”. We shouldn’t be trying to live paycheck to paycheck here. Thanks for the post!
    Mr Defined Sight recently posted…Lifestyle Creep Is A Perpetual BattleMy Profile

    1. MrDD

      I hear ya, no more debt besides a mortgage for me either. Not even for the mortgage interest tax either, as my interest is way too little and I only take the standard deduction. I think the interest is around $185/month now and dropping by about $2 every payment. It’s one of the ways I am able to get my net worth rising so well on one income that is about average.

    2. Amy Nickson

      Living paycheck to paycheck is dangerous.If an emergency comes in your way, you will have no other option than taking out a loan. Thus, building a solid saving cushion is mandatory.

  2. Graham @ Reverse the Crush

    While most debt is bad debt, depending on your level of discipline, I think some debt can be useful, or can be allowed. I look at it as managing my finances similarly to how a business manages their cashflow. This concept is not for everyone though, and should never be used with credit card or high interest debt. An example of using leverage to invest is using a margin account to buy stocks and then allow the dividends and future savings pay off the borrowed amount. I don’t do this often, but I have done it in the past. Overall, though, I think debt should be avoided in general outside of a mortgage because it builds equity. Thanks for sharing the guest post!
    Graham @ Reverse the Crush recently posted…Dividend Income Update #4 | September 2017My Profile

    1. MrDD

      I’ve always thought of debt as a fire. Fire is a tool that has so many benefits; warmth, light, cooking, metalworking, etc. But it can hurt you if you don’t use it properly. As long as you know how to handle it, it can be OK. The problem is that so many people don’t.

    2. Amy Nickson

      Yes, debts are bad, they generate stress only.

  3. Mitch

    Indeed, most debt is bad debt. However, debt to control rental property is something I do consider good debt. So long as it’s done right and used to buy a property that will cash flow positive. Otherwise, it then just becomes a liability as it is taking money out of your pocket every month.

    1. Amy Nickson

      Thanks for stopping by Mitch, yes since you need to save quite a big amount for a home, you can take out a home loan. But make sure you make a big downpayment and consistent with your monthly payments.

  4. Josh

    I personally think all debt is bad, but, I realize we need to borrow money to get ahead. The “catch” is that you need to know how much you can borrow and still be able to make ends meet if have a sudden drop in income, etc.

    My wife and I could have been approved for a larger mortgage for a bigger house, but, we didn’t want the extra payment say we told ourselves going into the process that we were only going to borrow a specific amount and didn’t do anymore.

    Student loans are also an easy way to bloat. While I love my alma mater, it’s a state school. It costs $25,000 a year for in-state students and $50,000 for out-of-state. Since I live out-of-state now, I don’t recommend it to the teens I teach because the piece of paper from that school won’t be worth the additional $100,000. I also tell them that it’s okay to go to trade school and not get a 4-year degree just because they think that’s what they must do to to stay cool with the crowd.

    Finally, credit card debt is always bad. Pay your balance off each month or use debit/cash instead.
    Josh recently posted…Stop Credit Card Offers From Entering Your MailboxMy Profile

    1. Amy Nickson

      thanks Josh for stopping by and sharing your valuable thoughts.Yes, accumulating credit card debt is absolutely a no-no.

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