Good Debt vs Bad Debt Argument

Do you want to get out of debt fast? We’ve often covered how to get out of debt, but we rarely discuss the different types of debt.

We’ve all heard about the difference between good debt and bad debt. We’ve also all looked into the argument of good debt vs. bad debt and attempted to decipher what category certain purchases fall under. We know that student credit cards can be bad. We all also assume that buying a home makes sense.

Seth Godin touched upon this topic recently, when writing about how consumer debt is not your friend and how to get out of debt:

Dave [Ramsey] has spent his career teaching people a lesson that many marketers are afraid of: debt is expensive, it compounds, it punishes you. Stuff now is rarely better than stuff later, because stuff now costs you forever if you go into debt to purchase it. He’s persistent and persuasive.

As a result, I want to open up this discussion and look at common purchases as to where they would fall under and how you should pay off debt fast.

Should you get out of debt fast by paying off your car?

Are you better off buying that used car with cash or that brand new car with credit?

There’s the argument that you need a car for the following reasons:

  • 1. Get around town.
  • 2. For job reasons.
  • 3. For job interviews.

My only comeback is this: do you really need to go into debt for that new car? I’m not telling you to take the bus, because that would just be lazy advice. The decision you need to make revolves around the thought process of how valuable is it for you to go into debt to acquire a new vehicle? Will a used car not be suffice? You don’t want to kill your finances because of a car. If filing bankruptcy becomes a consideration for you, then you should consult a professional for your options.

Your home/primary residence will make it difficult to get out of debt fast.

You shouldn’t view your primary residence as anything more than a shelter/place to live. If you start to view it as an investment, you will be really disgruntled during a recession, when home prices sharply decrease in value. Not only will lower home prices discourage you, but the realization of how much money goes towards interest and other related expenses, will definitely depress you.

On the other hand, your home may greatly appreciate in value and this increase could offset all of the other costs. Unfortunately, this is a optimistic and rare scenario.

There is no right or wrong answer in this discussion. There will be those that argue that rent is, “throwing money away,” and there will be those that urge you to wait until you have enough money to purchase the home with cash. At the end of the day, this will likely be the most important decision that you’ll ever make in your life. Put in ruthless amounts of research before you ultimately make your decision.

Your education…

Most young people don’t even think twice before acquiring debt to pay for their college education. I’m not saying that this is right or wrong, it’s just what happens.

One thing you need to consider is how much more valuable you will become with your Graduate Degree/new education. If you plan on starting your own business or working for yourself in any way, shape, or form, do you really need to go into debt for more education?

Once again there will be those that leverage the debt required to obtain a Graduate Degree and use it to score a 6-figure salary. There will also be those that use debt to pay for an education that will simply never benefit them.

Where do you realistically see yourself 5 years down the road, once you’ve used debt to expand your resume?

One more thing to consider is that you can get money for college to graduate debt free.

Before you learn how to get out of debt it’s important that you understand the different types of debt and why you are where you are.

What would you guys consider to be good debt? What would you consider bad debt? Do you even think there’s a such thing as good debt?

5 thoughts on “Good Debt vs Bad Debt Argument”

  1. MyFinancialObjectives

    Car- never buy new. Plain and simple. Losing thousands of dollars the instant you drive it off the lot = bad idea in my book. Buy a used car with just 5,000 miles on it if you really want something new..ish…

    I agree with fun stuff, all debt does suck. I don’t have a mortgage yet, but I have plenty of student loan debt… I personally view it as good debt because right now without my education, I would not have my current job, which is allowing me to pay for grad school, and pay down my education debt – not to mention live comfortably. Sure all debt is bad, but the majority of people in the workforce with degrees today probably would not have a degree if nobody took on student loan debt for school. For one, the cost of tuition is and has been rising much faster than the rate of inflation! That’s just not fair!

  2. Credit Innovations

    There really is no such thing as good or bad debt. In fact, debt can neither be totally good or totally bad. There are always two sides to the coin.
    No debt is good. The simple premise of debt is the risk and obligation you apply to your future self. When you take debt in whatever form you may want to classify it: good, sexy, bad, naughty; you are trading your future money (income) with your present pleasure (or comfort, if you want to call it that).

    All debts assume great risks, albeit in varying degrees. When you don’t assess the risk correctly, you lose – and you wallow in the quagmire of your debt.

    Here’s the other side … Let me ask you, do you use water, natural gas, electricity in your home? We all know the answer to that, of course; and guess what, you are actually using credit. Surprised? Well, you may not realize it but you are in debt to the water or electric or gas companies for services they provide even before you pay them. Make sense?

    Of course, it does. In an abstract sense you owe these utilities and that is credit. So, how does it differ from any form of debt or credit? You get something now (e.g. your comfort) with the promise to pay later; you pay on time, no penalties are attached. Well, if that doesn’t sound just like a credit card!
    Everybody uses credit, unless you are totally off the grid.
    Everyone uses credit unless you are completely off the grid. I would say that this is the extreme exception. Debt is not all bad; it can actually be used as investment to make more money out of it or maybe hedge against inflation. But you shouldn’t use credit to live beyond your means. Now that is a bad reason for debt.

  3. Frankly the fact that debt has a bad connotation and bad denotation should be evidence that is negative asset (like my play on words?:)

    For the a while now I had my mind stuck on buying a used 2006 Mazda3 hatchback I love the car, but even with what I had saved I didn’t have enought. I owuld have had to finance a few thousand. Then it struck me why the heck would I want to finance a USED car! So I had my dad search for me and I searched and finally today my father found a me a used car in my price range. Granted the Car will last me about 5-6 years but thats okay because by then I would have saved enough to buy my mazda3! During this time I will also aggressively be paying down my undergraduate student loans.

    I have to say I was among the few…thankfully I graduated with about 45,000 in loans. I went to a private school so this average to 1 years tutition! I know many others’ parents had to take out a second mortgage! even after this they had to go back and get a trade because they couldn’t find a job!

  4. I believe you definatly have some very good points. Alot of people like myself probably wish they would be able to say no to the things that put them into debt before they get to that point. I would never pay for a brand new car because it does depreciate in value as soon as you drive it off the lot, also if you could pay in cash which most people can’t, you would get a new car way cheaper. Isn’t that crazy, somebody who could afford to pay for a new car in cash would get it cheaper than someone who couldnt. Also, the used car for cash, i would be worried that i would put tons of money into it fixing it up, considering it was used, but that would be my choice. Also, being a college student i am already 5,000 dollars in debt, but i have only been in school for 6 months, half of that was to pay for my education, even after i was granted a pell grant. All debt is bad to me, my question is why does everybody say you need a college education and then you get 100,000 dollars in debt? Or buy a new car it will build your credit and you end up paying 7 grand in interest. I do not get it, can somebody explain that. Money money money!

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