Balancing Good Vs. Bad Debt In This Economy.

Every headline you read about personal finance right now says to get out of debt. With the economy crashing, the last thing you want to carry with you is debt, right? Well, yes and no – you do want to get rid of any credit card debt, for sure. But what about your mortgage, car, or student loan debt? Is it that important to get rid of all of that right now as well?

Not really.

There really are different categories of debt, and they can be simplified for this post into just two – good debt and bad debt. “Good” debt is kind of a misnomer, as any debt you carry is still money you owe to someone else. But there is a big difference between good and bad debt, and the one you need to be focusing on right now is “bad” debt. This is the kind of debt you want to try to get rid of quickly, as generally the interest rates are higher, the payment schedules are shorter, and the issuer of the bad debt could adjust the interest rate at any time. Sound familiar? Yep, we are talking about credit cards. This is the bad debt that you should be working on full time to try to get rid of. It’s one thing to have to worry about making the mortgage or the car payment; these are things essential to your day to day life. But worrying about making a minimum credit card payment for items you purchased years ago can be a real drain on the finances, especially as people are losing jobs and the money in their retirement accounts. This is why it is so important to not carry around credit card debt; you just don’t know when things will get rough. I remember when I had a minimum payment of $400 a month on my debt – that was so incredibly painful to shell out every month. Oh what I could have been doing with that $400 a month! The longer you wait to pay off your bad debt, the higher it will get and the more interest you will pay – not a good recipe for success. So even if you only have an extra $5 a month to pay on your credit card debt, please do so. For more help on getting out of credit card debt, check out my series “The Getting Out Of Credit Card Debt Challenge“.

The other kind of debt, the “good” kind, is a little easier to deal with. This is normally the kind of debt we take on to better ourselves and our situation – college loans, mortgages, business start up loans, etc.. These generally have much lower interest rates that are set in stone, and their repayment schedule is spread out a little further. Chances are that the companies will not ring you up one day to change your rate – you know what you are getting ahead of time and you can set up your payments to match. Houses normally appreciate in value over the long run, so we don’t mind taking on a mortgage payment to hopefully get that growth. Student loans can enable you to get higher paying and/or more rewarding jobs, so borrowing money for them is not seen as a bad thing. And starting a business can be a step towards financial freedom, so I don’t see a problem with taking out loans from the SBA. This is all what the experts call “good” debt in that it can be very helpful, whereas “bad” debt could be debt you have been carrying from buying too much stereo equipment back in college (like yours truly). Good debt needs to be repaid per the schedule, but you don’t need to try to kill yourself to get it paid off, especially in this economy.

Focus on the bad debt and think about how much easier your monthly bills would be to make if you didn’t have to make credit card payments all the time! Once you get rid of this debt, the only debt you have left will be the kind that hopefully will be helping your financial situation and not hindering it. Not all debt is created equal, and when you only have a set amount of money each month to work on paying it off, be sure to concentrate on the bad stuff. The other debt can wait; the important part is to rid yourself of that credit card debt. Think it cannot be done? Check out what Paid Twice has been doing to her debt load in the last year or so; when you put all your efforts into paying it off, it most certainly can be done!

If you have been working on paying off your bad debt, what kind of success have you had? What advice could you give to other people working towards the same goal? Let us know in the comments!

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Comments (10)

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  1. Miranda says:

    Sometimes we forget that the KIND of debt we have impacts us. Thanks for the reminder. We don’t have to get rid of everything, but it’s important to start with the most damaging debt we have.

  2. vilkri says:

    Good post. There is no successful and large business that was not at some point financed with debt. Not many people could afford a house if there were no mortgages. Not many young people have enough money to pay for college. – These are all good and almost always inevitable debts. In all of these cases you have an asset to show for your debt though: a business, a house, an education. If you have something to show for your debt, it is good debt. But only if the asset’s value is in line with the amount of debt you incurred to acquire that particular asset.

  3. David says:

    Bad debt is the real danger, but we are great at mistaking bad debt for good (and rationalizing our reasons for doing so.) Your post is a valuable reminder that there is indeed a difference.

    I hope the lessons of this economic meltdown are not lost on consumers. We can’t continue to be lead like sheep to the slaughter by greedy banks out after shortterm profits and by a culture that encourages us to spend money we don’t have on things we can’t afford. Sure, we are also to blame, but only because we have let uourselves be seduced and suckered.

  4. Joe says:

    I think the biggest factor concerning debt in a poor economy is the fact that all debt (good and bad) takes money out of your pocket. In recessionary times, this negative cash flow can have a major impact. A loss of income can mean a loss of a home for some people… try telling them that the mortgage was “good” debt.

  5. […] Balancing Good Vs. Bad Debt In This Economy. The economy may bring a few surprises in the coming months, so getting a handle on your debt is extremely important. […]

  6. fitwallet says:

    I’m throwing $500 at the credit cards every month. We’re down to about $2,800, so it will be fully paid off in no more than six months. We’ve had several MAJOR setbacks, though. We started out with about $3,500 in debt and had paid about half of it down when bad stuff happened. First was an old debt that came back to haunt my partner–to the tune of $3,500. Then there was another old debt which totaled $1,200. Sigh. Thankfully, I was able to transfer everything to cards with extremely low interest rates (3 and 4%).

    There’s nothing we can do about the setbacks, so I try not to let it bother me. And once June 2009 rolls around, we’ll have $500 more per month to put into savings, or $900 per month total! I’m so used to living without that $500, it seems weird to think of it as actual income.

  7. david says:

    That is awesome fitwallet, congrats!!

  8. […] Balancing Good Vs. Bad Debt In This Economy. Every headline you read about personal finance right now says to get out of debt. With the economy crashing, the last thing you want to carry with you is debt, right? Well, yes and no – you do want to get rid of any credit card debt, for sure. But…… Online Stores […]

  9. […] Fighting with Good v’s Bad Debt by My Two Dollars […]

  10. […] Am I stressed about something? A lot of times, I’m so clueless about things, I am blindsided by really obvious things. Someone suggested yesterday that you might be getting some acne because of stress and I instantly denied it, saying, I am not stressed, I’m free as a bird. But when I had a few moments to think about it, I realized I dont really know if I am not stressed. I might be stressing about the trip and my student loan situation subconsciously. I think finances are something that everyone worries about, underneath everything else thats’ going on in their life, like an undercurrent that is beneath their every conscious thought. Especially, if you have debt, you have additional thoughts going on in your subconscious about how all the stress related to being in debt, doesn’t matter if its the good or bad kind. My Two Dollars has a really good post about good vs bad debt. You can read it here. […]