Debt is Like Fat . . . There’s Good and There’s Bad
Everyone has debt. In fact, U.S. households were carrying a total of $12.84 trillion as of June, and it’s more than a heap of unpaid bills. It’s a portfolio that shows what we’re spending our money on and the types of credit we’re using to pay it off.
Credit score watchers may know this as credit mix and may also toss in the words good and bad to describe debt that’s in the mix, with particular distaste for credit card charges.
What we wanted to know: if it’s all being paid, what makes debt good or bad?
What we found: it’s murky.
It’s what you’re buying, not what you’re paying
The basic idea behind the labels is that good debt is something that could grow in value, like a house, or something that can help you earn more money, like a degree.
Bad debt is generally applied to items that have little inherent value or that lose their value (FYI: cars lose their value the second they are driven off the lot). Yet this same “bad-debt” car can be considered good debt if it’s essential to getting you to and from the job that lets you earn a salary-enhanced degree.
This good/bad concept is why credit card debt can feel unsavory – credit cards are usually used to buy things that won’t increase in value or help you earn more money.
A way to keep debt in check
Debt that provides a reward beyond ownership, like a home improvement loan that could have financial benefits later on is generally considered good debt, even though there’s interest.
Debt that provides little more than an opportunity to draw out payments and pay interest is debt without financial reward. Fleeting experiences – like a fancy dinner – could fall into this category. This is typically considered bad debt.
A key idea behind debt is that it’s a means to getting something of value, but things can easily get unbalanced. This is where the idea of good and bad debt may be able to come into play: as a way to measure what’s worth putting on your tab.
For information on how to improve your credit score, check out our guide – Getting and Keeping Your Credit in Shape.