Good Debt v. Bad Debt - Is It Ever A Good Idea To Go Into Debt?

Updated: May 13, 2018

You want me to go in to debt? Did you really just say you want me to go into debt? Good debt? Isn't that an oxymoron? Is there even such a thing?

We explain the difference between good debt (things that can contribute to bettering your future: getting a degree, buying a home and starting a business) and bad debt (vacations, luxury purchases, gifts, etc.). Of course, there can still be risk with good debt, but you can have a starting point to know the difference between what to charge, or take a loan out for and what not to.

Reasons to Go Into Debt

- Education: Get a college degree.

A college education does not guarantee a good income. However, according to the U.S. Census Bureau, college graduates earn nearly double that of high school graduates. So taking out a student loan to pay for your college education might be a good idea if you get a degree in a field that has a good or guaranteed income.

- Real Estate: Buy a home.

Real estate is typically considered a good investment because houses increase in value. Shopping around and finding the right mortgage with the best terms can leave you with a valuable asset that helps your credit and financial goals.

- Business: Take out a business loan.

If you have a business idea, taking out a loan to get you started is often needed just to begin. As you start making money pay back the loan. Soon, you’ll be debt free and the profit can help you continue to fund your business, or grow your profit continuously. Make sure you invest in things you really need: including a quality and professional website.

Bad Debt

Reasons Not to Go Into Debt

  1. Go on vacation.

  2. Buy fashion and clothing, such as designer purses, shoes, etc.

  3. Pay off other debt (unless you find a debt consolidation loan or complete a balance transfer with better terms).

  4. Buy gifts for others or household items you don't need yet

  5. Funding a lifestyle that is currently beyond your income

Instead of using credit or loans to pay for consumable goods, save and use cash or use a credit card and pay it off right away. That way every time you see those items you aren't filled with regret, but instead happy that you bought it when you could afford it.

Good Debt Can Go Bad

Good debt can turn bad, so you need to look carefully at terms and ability to repay.

  • Take out only the amount of debt you really need: student loans that to cover your actual education expenses,enough mortgage to purchase a home you can afford, and a business loan to cover startup costs: including a quality and professional website.

  • Make your payments on time and if you need help, contact your lender asap. You want to make sure your good debt is actually helping your credit score.

Debatable Good Debt v. Bad Debt

Consolidation Loans For consumers who are currently in debt, taking out a loan at a lower rate of interest is a great idea, in theory. However, you have to make sure you find the right loan with the best terms.

Borrowing to Invest

Borrowing money at a low interest rate, or leveraging, and investing at a higher rate of return, may appear to investors as a great way to achieve better-than-expected results. There are a ton of risks for those who are inexperienced and you can easily lose a lot of money.

Credit Card Reward Programs We touch on this in other articles, if you are already managing your finances well, theere are some great credit card reward programs available. The money spent using credit cards can help buyers earn free First Class airline tickets, cruises, cash back and other benefits. However, you need to be sure you pay off the credit cards without adding interest and already have control of your finances.

Disclaimer: The content on this site is provided for information and discussion purposes only. It is not intended to be professional financial advice and should not be the sole basis for your investment, financial or tax planning decisions. Under no circumstances does this information represent a recommendation to buy or sell securities, or any other products, or services. All content and information is subject to change at anytime.