Defining Differences between Bad Debt and Good Debt

Getting Out of Debt For Dummies

Whether your debt is good or bad depends on the type of debt, the reason you owe it, and whether you can afford to repay it. When used the right way, debt can help you manage your finances more effectively, leverage your wealth, buy things you need, and handle emergencies.

Debt can be a positive force in your life when it helps you

Build your family’s net worth — the difference between the current value of your assets and the amount of debt you owe. A mortgage is a perfect example. Good debt is even better debt when the value of the asset you finance increases over time.
Buy something that will save your family money for years to come. For example, you get a loan so you can weatherize your home and lower your utility bills.
Purchase something important or essential to your life that you could never afford to buy if you had to pay for it with cash. Examples of this kind of debt include a car loan and a mortgage.
Invest in yourself in order to increase your earnings potential. For example, you borrow money to return to college or to upgrade your skills so you can make more money in your current field of work or move into a more lucrative career. Student loans are a common example of this kind of debt.
Pay for an unexpected emergency when you don’t have the cash to cover it. For example, your car breaks down far from home and you need to have it towed; or you have no health insurance and your child needs expensive medicine.

However, debt can be a negative force in your life when you

Go into debt to buy nonessential goods or services that do not increase your wealth and have no lasting value. Examples include restaurant meals, groceries, clothing, personal items, and vacations. The longer you take to repay the debt and the higher the interest rate on the debt, the worse the debt. Credit card debt is the most common example of this kind of debt.

Credit card debt is not bad if you pay it in full as soon as you receive your statement, or if you pay the debt in full within a very few months and you don’t charge more on the card until you’ve paid off the outstanding balance on your account.
Secure the debt with your home or with another asset you don’t want to lose when you’re not sure that you can afford to repay the debt.
Have a high interest rate and make low monthly payments. By the time you pay off the debt, the amount you pay in interest exceeds the value of the product or service you financed.
Borrow money from dangerous lenders like advance fee lenders, payday lenders, and finance companies.

About This Article

About the book author:

John Ventura: John is a best-selling author and a nationally boardcertified bankruptcy attorney. He is also an adjunct professor at the University of Houston Law School and the director of the Texas Consumer Complaint Center at the Law School.
As a young boy, John dreamed of becoming a Catholic priest so he could help everyday people, and he spent his high school years in a Catholic seminary. After graduating, however, John decided to achieve his dream by combining journalism with the law. Therefore, he earned an undergraduate degree in journalism and a law degree from the University of Houston Law School. Later, he and a partner established a law firm in Texas, building it into one of the most successful consumer bankruptcy firms in the state. He subsequently began a successful consumer law firm in South Texas.
Today, as Director of the Texas Consumer Complaint Center, he supervises law students as they help consumers with their legal problems. He is also a regular speaker at law conferences around the country and serves on the Bankruptcy Council for the Texas Bar Association.
John is the author of 13 books on consumer and small business legal matters, including Law For Dummies, 2nd edition; The Everyday Law Kit For Dummies; Divorce For Dummies, 2nd edition; and Good Advice for a Bad Economy (Berkeley Books). John has been interviewed about consumer money matters by numerous national media including CNN, NBC, NPR, Bloomberg Television & Radio, The Wall Street Journal, USA Today, Newsweek, Kiplinger’s Personal Finance, Money, Inc. Martha Stewart’s Living, Bottomline, Entrepreneur, Bankrate.com, CBSMarketWatch.com, and MSNMoney.com. In addition, his comments and advice have appeared in major newspapers around the country, and he has been a frequent guest on local radio programs.

Mary Reed: Mary Reed is a personal finance writer who has coauthored or ghostwritten numerous books on topics related to consumer money matters and legal rights. The books she has coauthored with John Ventura include The Everyday Law Kit for Dummies, Divorce For Dummies, and Good Advice for a Bad Economy (Berkeley Books). Mary has also written for the magazines Good Housekeeping, Home Office Computing, and Small Business Computing, and she has ghostwritten numerous articles that have appeared in national and local publications.
Mary is also the owner of Mary Reed Public Relations (MR•PR), an Austin, Texas-based firm that provides public relations services to a wide variety of clients, including authors, publishers, attorneys, financial planners, healthcare professionals, retailers, hotels, restaurants, and nonprofits.
Prior to starting her public relations business and writing career 20 years ago, she was vice president of marketing for a national market research firm, marketing director for a women’s healthcare organization, and public relations manager for Texas Monthly, a national award-winning magazine. She received her MBA from Boston University and her BA from Trinity University in Washington, DC.
In her free time, Mary serves on the board of a community development corporation in her neighborhood. She also enjoys long morning bike rides, road trips with her husband, gardening, working her way through the stack of books by her bed, taking care of her six cats, and spending time with her family and many friends.