[BUSINESS] Good Debt vs. Bad Debt
- Good debt vs. bad debt
Sometimes it makes sense to borrow -- but a lot of times it doesn't.
It's almost impossible to live debt-free; most of us can't pay cash
for our homes or our children's college education. But too many of us
let debt get out of hand.
Ideally, experts say, your total monthly long-term debt payments,
including your mortgage and credit cards, should not exceed 36
percent of your gross monthly income. That's one factor mortgage
bankers consider when assessing the creditworthiness of a potential
It's far too easy to spend more than you can afford, especially when
you pay by credit card. The average U.S. household with at least one
credit card carries nearly a $9,200 balance, according to
CardWeb.com, and personal bankruptcies have hit record highs in
Of course, avoiding debt at any cost is not smart, either, if it
means depleting your cash reserves for emergencies. The challenge is
learning how to judge which debt makes sense and which does not, and
then wisely managing the money you do borrow.
Good debt includes anything you need but can't afford to pay for up
front without wiping out cash reserves or liquidating all your
investments. In cases where debt makes sense, only take loans for
which you can afford the monthly payments.
Bad debt includes debt you've taken on for things you don't need and
can't afford (that trip to Bora Bora, for instance). The worst form
of debt is credit card debt, since it usually carries the highest
Sometimes the decision to borrow doesn't hinge on how much cash you
have, but on whether there are ways to make your money work harder
for you. If interest rates are low, compare what you'll spend in
interest on a loan versus what your money could earn if it were
invested. If you think you can get a higher return from investing
your cash than what you'll pay in interest on a loan, borrowing a
small amount at a low rate may make sense.