One often hears about “good” debt and “bad” debt. Unfortunately, for many, this distinction can be confusing. Many well-intentioned folks find themselves on the road to debt hell as they realize that their “good” debt has turned “bad.” Here are some examples:
We are primed to think of a home mortgage as good debt. Borrow to buy a home and you are a property owner. However, it is important to make sure you are ready to take the step from renting to buying. If you decide you can afford a home, you need to get a payment you can afford. BankingMyWay.com has mortgage calculators that can help you determine what you can afford. Get a reasonable interest rate that won’t reset to something unaffordable in a few years. The recent mortgage market crash is a perfect example of what happens when you over-reach, even if you are getting into good debt.
(Buying a home? Read this article about thinking small.)
Debt for education is often considered a wise use of borrowed resources. Unfortunately, when college is over, many students find themselves beset by crushing student debt. In order to prevent this, do an analysis of how much you really need to borrow. Taking $12,000 when you figure that you only need $9,000 is a good way to find yourself in trouble. Also, consider what you’ll make when you’re done. Taking out hefty student loans for a career that won’t provide you the salary you need to make payments can quickly turn your post-college life into a debt-ridden nightmare.
(Ever think about using student loans to pay off credit cards. Check out this article to learn more.)
Borrowing should always be done sparingly, and you should borrow as little as you can—no matter how good they tell you the debt is. The key to keeping good debt good is borrowing within your means from the start.