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Good Debt vs. Bad Debt : What You Should Know

Author: Financial Success | Image: Financial Success

Good news, Cyclones! While the Spring semester may be winding down, it looks like the temperatures will be on the rise towards the end of this week! I hope it’s safe to say that Spring is finally here. While many of us plan to celebrate the warm weather by biking, “hammocking” on campus (did I say that right?), or enjoying a warm night of grilling on the patio, April has given us yet another reason to celebrate. It’s National Financial Literacy Month! In accordance, we will be doing a two part blog post this month to help boost financial literacy awareness.

To start, financial literacy encompasses many parts, so it’s hard to pick just one. There are many hot topics now, including loan debt, credit, money management, budgeting, spending, saving, the list goes on and on! Our first topic is going to delve into assessing good and evil…. Good debt and evil debt that is! Okay, the correct term is good debt and bad debt, and yes there are two different kinds.

Sadly, debt has become the accepted norm for the average American. You’ve heard the mentality “Yeah, I have debt, but so does everyone else. It’s just a fact of life.” False! There is a lot to be said about being debt free. Not only are you saving yourself money, but you now have more flexibility for retirement savings, and other life moments.

Now, I do realize that debt is necessary for some purchases. This is the area that we like to call good debt. Good debt appreciates in value from the time that you buy it. A home mortgage is considered a good debt because a home is something that historically rises in value and you can expect the house to last longer than the loan. Student loan debt, when borrowed for educational expenses, can be considered a good debt because it is an investment in your future. You can expect that the loans that helped pay for your college tuition, will pay off in the end and lead to a better job, giving you a step up in the world. These are both good types of debt. Some others that make the list – real estate loans and business loans.

If you can infer from the previous paragraph, bad debt means it ____ in value. If you said depreciates or decreases, you are correct! (Think items that are easily consumed, like food, clothing, vacations, and other consumer goods.) These items are easily borrowed on credit cards and store credit cards, and have a tendency to snowball, with higher interest rates and fees attached. An auto loan can also be considered bad debt, especially when you borrow more car than you can afford. Whether you buy used or new, the value is guaranteed to depreciate the moment you drive it off the lot. But we will save “Becoming a Savvy Auto Shopper” for another day…

The bottom line is that there is good debt and bad debt. Most people need to borrow at some point in their life but too many debt payments can take up a lot of your discretionary income. Think twice before swiping that credit card at the mall and really ponder, is it worth the money?

If you would like schedule a debt management appointment, please call us today at 515-294-2223! And Happy National Financial Literacy Month from our staff here at the Student Loan Education Office.

Pratt, Bill. Weitzel, Mark. Rhodes, Len. Trombitas, Kate.MBA, Kate Trombitas. Financial Well-Being. Inceptia: 2012. Print.