NO. All debt is NOT bad. This flies in the face of many personal finance gurus who want you to believe all debt is evil. They shout at you saying: Pay off your debt! Don’t be a slave to debt!
It is very simple to just say all debt is bad and tell people to pay off credit cards and be done with the topic. The issue with this is those who give their readers this advice are really doing them a disservice. Debt, when used correctly, is a tool that can actually help you with your finances. In order to turn debt into a tool you need to educate yourself on the differences between good debt and bad debt, which I will present to you later on.
Why is Debt Perceived to Be Bad?
One word: Misuse. The majority of the population misuses debt. How do you misuse debt? When you purchase consumer goods you are misusing debt. If you purchase goods that you don’t even need to begin with, and you are using a credit card to purchase them, you are digging a hole in quicksand. It’s a trap that is easy to fall into, and almost impossible to get out of. Not only are you purchasing something that won’t have much value, you are doing it on credit cards which have astronomical interest rates. Let’s take my friend Barry for example. Barry recently bought the new iPad Air. Seeing as it cost $499, and he didn’t have that kind of money, he purchased it with his credit card. He thought he was getting a great deal because he would only have to pay $15 dollars month. However, I already knew this was an awful idea. Then I found out his interest rate was a whopping 14%, which is on par with national averages. How long will it take Barry to pay off his iPad by making minimum payments? 43 months or over three and a half years. Not only that but he will pay almost $137 in interest alone. That iPad doesn’t so sound appealing now, does it?
If you are using debt to buy things that don’t appreciate it, you are misusing debt. Debt makes it too easy to purchase goods. All you have to do is swipe a card and you have a new iPad! But do you really think about it? Instead of delayed gratification of saving money and then making a purchase, you are giving yourself instant gratification. Credit cards will make it seem like you have more money than you actually do. By the time it is the end of the month you realize just how little money you have!
Don’t be an abuser of debt. In the end, the debt man with always win. Instead, choose to work with debt to help you achieve a goal. Use debt to your advantage. Utilize debt as a tool in the toolbox.
Debt as a Tool
Debt can be extremely useful. One way that debt can be used as a tool is that it will allow you to purchase assets that you otherwise could not purchase. Debt will allow you to do something that you could not normally do unless you inherit money or have a rich uncle.
Good debt will allow you to make investments in yourself and assets. Take a moment to think about things that you would be unable to purchase if you were unable to take out loans. One thing that comes to my mind is a home. You are putting debt to work and building equity in something that appreciates over time. Good debt will also allow you to make other investments. Student loans enable you to go to school while business loans can help you expand quicker than you would be able to do otherwise.
Debt will also help you build your credit. If you utilize credit cards correctly and pay off the balance every month, you will build up your credit score. Having a good credit score will enable you to take out loans at a much lower interest rate than your counterparts. It never hurts to have a good credit score. You never know when you might need to take out a loan.
In summary, all debt is NOT BAD. Don’t let the experts fool you. Debt can be a great tool if you use it correctly. In my next post I will further differentiate and give specific example of what is good debt and what is bad debt.