Bankruptcy

Good Debt vs. Bad Debt: The Pizza vs. Your Mortgage

By rwaple

Admit it, you?ve all been there.  It?s midnight, you spent all your cash on the $2 special at the pub, and you and your crew are starving.  ?No problem,? you declare, ?I got it on my card.?  Problem solved, you?re a hero, end of story, right?  Right, if you understand the responsibilities which accompany carrying debt.  There?s good debt and there?s bad debt.  Good debt gets paid on every month and is very clean.  Credit card debt, when handled responsibly, provides you, the owner of that debt, a convenient line of credit which was managed proactively, affords you some additional freedom.

It?s important to understand the different types of debt one can carry.  There are large debts, like mortgages and car loans, which are often budgeted for.  They are substantial payments which a logical person wanting to keep a roof over their head and wheels under their feet would plan for.  They are fixed costs.  For most people, only by going into debt can one afford to acquire them.  They are risky if you over extend your financial viability on your purchase or make a bad decision in regards to negotiating your loan, but inherently they are good debt.  Prior to the current sub-prime debacle going on in the US mortgage industry, one needed relatively minimal established credit history to get a loan to buy a house.  Those who responsibly planned for such loans were afforded good debt.  Paying your mortgage every month is a great way to carry good debt and establish a firm credit history.  Regardless of the type of good debt you carry, if you continue to be in good standing with that debt, it?s generally considered a positive move.

Bad debt though is constantly lurking around the corner!  Don?t think it?s so easy to be in debt and be OK.  Credit cards are really great, and really bad.  For example, my story above about the late night pizza and the ability to follow through on something like that is a real life example.  Do that a few times a month.  Next thing you know you don?t have any cash at the pub, and you end up buying rounds of drinks for your mates.  You use your credit cards as cash, and figure one of two things.  You say to yourself, ?I?ll pay it all off next month.?  Or, ?This is great; I get all this stuff for $50 a month!?  If you?re the first person, you pay off all your credit card balances every month, with all the cash you would have spent in lieu of using that credit card.  The card is a tool in making your life convenient.  You only qualify as that person though if the balance on your cards is $0.00 most every month.  If you?re the second person, who is as naïve as to think that anything in this world is free, you?re cruising for some bad debt bruisn?.  Balances carried more than 30 days on average carry an interest rate.  The average consumer credit card interest rate is somewhere around 14.5%.  Add in a late payment, and that rate goes through the roof, oftentimes more than doubling.  The late payment fee is a killer too.  Minimum payments don?t work.  At some point, the interest compounded each month is more than the minimum payment you?ve been making and next thing you know; you?re looking into filing bankruptcy to help deal with the debt.  That?s bad debt.

The moral of the story is this.  Work hard to establish good debt and stay current on it!  Be very wary of the lures of credit card utopia and bliss unless you are sure you can pay it off in full all of the time.  Debt doesn?t have to be a bad four letter word!

-DPearlman

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Full post as published by BKHQ Bankruptcy Blog on December 04, 2007 (boomark / email).