Bad Debt? Can't I have Good Debt?

Credit is easy to get today. Too easy. How much junk mail do you get every week which is an offer from one credit company or another offering you the chance to go further into debt?

It used to be that credit companies would only look at good risk customers. They wanted to make sure that the loans could be repaid. But then, it used to be that cars couldn't travel faster than 30mph and you'd still have change from a twenty after a good night out. Things have changed.

Now, anyone will loan you money whether you have good credit or bad.It's the debt cycle that these loan companies love. If you find yourself in the debt spiral all you cn do is get even further into debt. And people wonder why America is in the trouble it's in?

It's no secret that debt is a complex subject. We all have it. We all hate it. We're all tempted to have more of it. But is more good or bad when it comes to debt?

Some credit is good. But before you rush out and start spending your yet to be earnt cash you need to know what debt is good. A mortgage is a good loan, for instance, whereas a credit card is bad credit! A business loan is good, but a car loan not.

So how do you know what's good debt and bad debt. Well, the experts have a very simple rule of thumb and it's as follows:

Assuming you had to take a loan out to buy something then:

If, as soon as you buy it, it depreciates in value, then that'd be a bad debt loan

and conversely:

If what you buy has a chance to appreciate in value, then that would be a good debt loan.

So, a few examples. You see that Camero in the car sales forecourt and it's just screaming your name. You're sold before you even enter the showroom. No need to test drive it, you just need to know where to sign. $50,000 fine American dollars later, you drive it out of the showroom and onto the tarmac and instantly the car is worth $20,000 less than when you signed. That'd be bad debt.

So you're driving home and you see a lovely 4-bedroom home for sale which would make a great family home. You pull your Camero into the drive and you're lucky enough to find the realtor visiting. What luck! A few signatures later you've just bought a $300,000 home on credit.

After a couple of months you've moved in and your camero looks grand parked outside your house. Whilst admiring how the sun shines off it's paintjob you notice your neighbor, who happens to live in a house exactly like yours, has put his house up for sale. For $400,000! A quick phone call to your realtor tells you that home prices in the area have increased. Your home is also worth $400,000 now. This would be good debt.

Other examples of good debt would be to pay for a college education using student loans or setting up a business with a business loan -- because you're increasing your earning potential.

It becomes a little muddier when it comes to refinancing current debt, but using our rules of thumb if you have a credit card debt at a high interest rate, then paying that off with a low interest rate home equity loan would be a good debt. It's saving you money in the long term.

Now for bad debt. Anything you buy, like that Camero, that depreciates as soon as you buy it is bad debt. If you use a credit card or other high interest loan, then not only do you lose the amount that the item instantly depreciates by but then you have the privilege of paying interest on the full ticket price. So, if you get a 10% loan to buy it, you'll end up paying $55,000 for a car worth $30,000.

And that's BAD CREDIT!