Is Your Debt ‘Good’ or ‘Bad’? It Depends
BY SEAN PYLES
Are student loans good debt that can open the door to a career or an insurmountable burden? Is all credit card debt a sign of reckless spending, or can it be a smart way to cover an expense? In general, no form of debt is inherently “good” or “bad.” What makes it good or bad is how it fits into your overall financial picture. Good debt is manageable within your budget and can help you achieve your goals. On the flip side, bad debt is unaffordable and can overwhelm your finances. Ask yourself these questions to determine if you’re dealing with good or bad debt. Then see how you can manage it.
WHAT LED TO THE DEBT?
The reason you took on debt can help you determine whether it’s helpful or harmful. “Any debt that is taken on because people don’t have any kind of choice means they are starting out in a place of disadvantage,” says Ida Rademacher, a vice president of nonprofit think tank Aspen Institute. “That can create a spiral that can prevent people from being resilient.” Conversely, Rademacher says, “the more helpful forms of debt can help people to become more resilient.” Student loans, for example, may enable a career that offers a high salary, making you more financially sound. Think about whether you incurred the debt: TO ACHIEVE A LONG-TERM GOAL: Student loans and auto loans can fit in this category. These debts can help you move ahead in life, so long as you don’t take on too much. OUT OF CONVENIENCE: These are debts you incur to make other aspects of your life easier, such as when you have a big one-time expense and don’t want to deplete your savings. They can be benign if they’re helping you manage your overall financial picture. DUE TO AN EMERGENCY: Desperation debt can be dangerous. A need for cash in a hurry can leave you with limited options and result in high interest costs.
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