How to distinguish between good debt and bad debt
It depends on the definitions of good and bad, but in personal finance I believe good debt is generally any debt that we use in order to make a profit. The profit doesn’t have to come in the form of money or financial benefits. Borrowing money to attend school, for example, can be profitable for our minds and personal development, because learning tends to make us smarter.
If we don’t have a lot of savings but are out drinking with some friends anyway then paying with a credit card would be a good use of debt. Using credit is better than asking a friend to pay for our drink, and there’s usually an interest-free grace period on credit card purchases. Even if we decide to maintain a balance on our credit card and end up paying 100% interest over time before finally paying off the balance completely, it would still be debt well used. Surely drinking with friends is a pleasant experience. Otherwise we wouldn’t have done it. So therefore we still profit from the situation by having a good time. If you ask me, friendship is worth more than the cost of one night out, even if we factor in the interest.
Some people avoid using debt because they don’t understand how it can help them be profitable. Being in the dark about how to use debt properly can be costly in the long run. But the best way to remove doubt and risk is through knowledge. Once we learn the ins and outs of how an economic system functions, the uncertainties and unknowns that we once faced will fade away.
Bad debt, to me, would be going into debt without the reasonable expectation to profit from it. 😕 But I can’t think of any situation where someone in their right mind would ever do that, lol.
I actually don’t know of anyone in my personal life that has actually taken on bad debt. Everyone I know who used debt did it for the right reasons at the time. I believe every kind of personal debt can be good debt. 😀 Student loans is an investment in higher education. Credit cards offer instant gratification which adds immediate value to the present, while delaying the payment until later. A car loan can dramatically improve one’s commuting experience.
Obviously debt can be abused or mismanaged. But for the most part people appear to use debt in order to improve the quality of their lives. For better or for worse we live in a society that revolves around debt. Those who don’t learn to control their debts are doomed to be controlled by their debts 😉
Random Useless Fact: