My First Technorati Article Good Debt and Bad Debt

I am now officially a writer at Technorati, I am really excited about the prospects and at the same time humbled at being admitted into one of the top writing sites on the Internet. Here’s my first article posted on Technorati, edited slightly so that its not the exact same replica, apparently Google hates duplicate articles for some reason and I am going to avoid doing just that.

Good Debt and Bad Debt

Article first published as Good Debt and Bad Debt on Technorati.

Seems like most people have some sort of debt on their Personal Balance Sheet nowadays. A debt is an instrument which lets you spend the money first and then pay it back later over time. There are some who argue that debt can be categorized into good debts or bad debts. What constitutes a good debt and what constitutes a bad debt? The common explanation for good debt is debt that makes you richer, while bad debt is one that makes you poorer.

However, my personal belief is that there is no such thing as good debt or bad debt. A debt is a debt, which means you are indebted to somebody or entity. Too much debt is certainly not a good thing, be it good debt or bad debt. Good debt can become bad debt suddenly. For example, a housing loan used to purchase a property which later crashed in value by 40%. Good debt was utilized for an investment, but it turned into bad debt because now the house has lower value than the housing loan you owe to the bank.

There are some books which describe car loans as one of the bad debts. The financing expenses of a car are undeniably high, coupled with depreciation of the car and upkeep makes car ownership a very costly affair. Now, that would be bad debt isn’t it? What if the car is the instrument that helps you to make money, it’s a means of transportation to get you to work. Perhaps the fact that you own a nice car helps to build confidence in your customers so you can close more sales. Would it still be bad debt? Or is it now good debt?

Another case is credit card. It is often made out to be the nastiest debt to have, for good reason. The credit card balance over time incurs the highest interest rate in excess of 20% per year. A credit card is a great tool for cashless transaction and allows you to enjoy one month of interest free payment if used in a controlled manner. The reward points and cash back schemes are more reasons to use the credit card as a way of saving money. If you could save 2-3% for every dollar expended on the credit card, it certainly makes sense to swipe your everyday expenditures onto the card.

The crucial point before incurring a debt is to completely understand what the cash from the debt is used for and the effect it has on you financially in the long-term. If the debt is used to purchase an asset, make sure that the utility or financial return from the asset is higher than the cost of debt. It is also vital to ensure that you are not overleveraged where your borrowings exceed your assets or where you have difficulty servicing the loans. It is not advisable to take on any new debt when you are overleveraged, regardless of its purpose.