The Difference Between Good Debt and Bad Debt

The Difference Between Good Debt and Bad Debt

Good Debt Versus Bad Debt

After writing and posting the article “Until Credit Do Us Part,” we received a few emails from women who felt they understood why all debt is bad; the reason being is because it interfered with their personal life. One woman, in particular, wrote ” I finished medical school and a medical residency but was told by a close relative, I would probably never find a husband because I have excessive school loan debt.” She then wrote and said, “now I understand why my relative made such a statement, after reading your article.”

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I need to clarify something. Even though this website has nothing to do with finding husbands, I just need to say that I don’t believe that a husband is something you “find.” Enough said about husbands.

Now I need to clarify the difference between “good debt” and “bad debt.”

Examples of bad debt are:
-Debt accumulated on items that do not increase in value over time.
-Debt that increases the total cost of items by two to three times the original value, when you consider the interest charged over time.
-Debt that charges compounded interest. This means the interest is charged on the outstanding balance, not just the original principal.  Therefore, you end up paying interest on interest and principal, and interest on the previous interest and principle.
-The worst part is because most of these goods and services decrease in value over time, many of them you may not even own by the time you are finished paying for them.

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Examples of good debt are:
-Debt accumulated on goods or services that increase in value over time.
-Debt that charges simple interest, instead of compounded interest. This makes it easier to pay ahead of schedule and pay off the charges early.
-Examples of good debt are home loans and school loans.
-Provided you acquire payments that your employment can bear, these are considered good debt because most homes increase in value over time.

-School loans are considered good debt, when you keep them low, because-

#1) they allow you to acquire a job
#2) most of the jobs will increase in income over time
#3) most school loans charge simple interest, making it easier to pay them off early, by making small additional payments.

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-Business startup loans are also a form of good debt, provided you have expertise, experience, and proper preparation for the business you are starting. I hope this clarifies things a bit.

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The difference between good debt and bad debt

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The Difference Between Good Debt and Bad Debt

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18 Responses

  1. Mitch

    I am so happy that I have been able to not have bad debt anymore! I would like to be able to have some good debt in the form of a mortgage sometime soon!

  2. Ben

    This is going to help a lot of people. Some people think any form of debt at all is bad, but you do occasionally have to take on some debt to accomplish good things.

  3. Brandy Ellen Writes

    What a fantastic conversation to have! We are working towards rebuilding credit and find that some debt is of course good and helpful to have. I’ll have to use this to share with my friends who need to hear this!

  4. Pam Wattenbarger

    Our large deft is good debt since it is our house. The only other debt we have is a small car payment. Unfortunately, I know that the car decreases over time.

  5. Tammy

    I’m happy to say I only have a mortgage and I consider that a good debt since the value of my home is increasing. Debt can ruin so many lives. Great post.

  6. Jenn @ EngineerMommy

    Not all debt is created equal. Thanks for sharing this post and educating so many on the different types of debt that exists.

  7. Kathy

    It’s nice to know more about these differences. I’m glad I only have a couple of debts right now. Our mortgage as being one and a loan from something else that is just about paid off.

  8. Ruth I

    My sister bought a car for my parents a few years back. One of the reason she got approved by the bank for it is because she has a house loan. Good debt!

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