Get Out of Debt

(33) Understand the Difference Between ‘Good’ & ‘Bad’ Debt

Yes, there is good and bad debt relatively speaking and you need to appreciate the difference between the two in order to reduce debt and build credit.
Good debt is “investment debt” so that when you borrow money, you expect to make money on the borrowed funds. What are examples of good debt? Home mortgages, loan for a college education, a business loan to start or grow a business and other real estate loans.
Bad debt, the kind of debt you want to hit head-on, are epic in our society. Purchasing a new car, clothing, expensive vacations, appliances are all examples of bad debt because the moment you make the purchase, the price of the item, the new car for example, drops in value. The differences between good debt and bad debt are often subtle: If you buy a vehicle, let’s say a hamburger wagon, to start a business selling coffee and food to office workers on their way to work, would be an example of good debt. On the other hand, buying a $250,000 house in a $250,000 neighborhood and then installing a $50,000 kitchen is an example of bad debt because in all likelihood, you will never recover that money on the sale of the house, because it remains a$250,000 neighborhood.
Taking out a home equity loan to pay for a big vacation is an example of bad debt. Taking out a home equity loan to pay off a $20,000 credit card debt for which you are being charged 18 percent interest is an example of good debt.