Good Debt… Is There Such a Thing?

posted by Andrea | 11/16/2011

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I am NOT a financial expert — just a really cheap Dutch woman!

And even though we use a credit card for almost EVERY SINGLE thing we purchase, I am 100% against credit card debt… and I’ve never once paid any interest, late fees, finance charges etc. It’s how my parents taught me and it what makes sense for Dave and me.

However, I’m not 100% against any debt at all.

Again, I’m not a financial expert, but I’ve talked with enough bankers, accountants, investment agencies, and other financially savvy people to know that some debt CAN be good debt! 

I know it sounds crazy to think there could be such a thing as “good debt”, but without any debt at all, it’s very difficult to have a credit history or a credit report. And without a credit report, you will probably have a difficult time if you ever needed to take out a loan or open a credit card — especially now days when banks are really cracking down.

What Debt is Good Debt?

1. Having a credit card balance and paying it off IN FULL at the end of each month.

As I mentioned before, I’m 100% against credit card debt, however our credit card ALWAYS has some sort of balance from that current month. And even though we pay the balance IN FULL at the end of each month {and never pay any interest or fees} it is still considered a “debt” during that specific month because we own money that we haven’t paid yet.

And as long as you pay your balance in full each month, this type of debt actually looks really good on your credit report because it shows you are responsible and pay off your debt right away.

2. Student Loans:

Oh don’t even get me started on students loans!!! These were one of the debts we diligently worked to pay off — thanks to our Before Baby Bucket List. And even though I just hated having this debt, I was told that student loans are actually a good debt to have.

They usually have very low interest rates {mine were around 3% and Dave’s were actually at 0% because he was getting his masters}. They also show that you’ve participated in higher education which will hopefully prepare you for a higher paying job… and allow you to pay the loans off quicker.

3. Mortgage Loan:

I would say that FOR THE MOST PART, mortgage loans are classified as good debt because your home is probably your most valuable asset and it SHOULD continue to appreciate in value over time.

However, we all know how awful the housing market is right now and if you took out a mortgage for way more than you can handle, it might NOT be considered good debt anymore.

4. Small Loans that are quickly repaid:

There may be times, either for business or personal reasons, that you just have to take out a small loan. And even though it might be considered bad debt initially; if you pay it off quickly, it could actually help your credit report by showing how responsible you are with paying off debt.

 

What if You Have Bad Debt?

I’ve been told that even if you have “bad debt” like a car loan, unpaid credit card debt, etc. it still might not hurt your credit report as long as you are making regular payments and decreasing the over-all debt amount each month.

So that’s just something to keep in mind as well! 

 

There is SO much more information I could share on this topic, but since I’m not a financial expert, I don’t feel like I should. However, as the holiday season continues to inch closer… and as you are tempted to buy “one more thing” for everyone on your list… just keep asking yourself if it’s worth getting into “bad debt” or not.

I would say that 99% of the time it’s NOT! 

What are your thoughts on good debt and bad debt?

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9 comments

  1. Deni

    11/16/2011

    My husband and I took the “Financial Peace University” course at our church and it has transformed our life! We had been carrying around “bad debt” for years, and after cutting up the cards and creating a budget we paid it all off in 1 year! Although we still have a mortgage, the burden of credit card debt is gone. What a relief!!! I have to agree with you about keeping at least one card and being very responsible with it. We did keep one to keep our credit score up. Thanks for all of your advice Andrea!!!

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  2. Tammy

    11/16/2011

    Another huge Dave Ramsey fan here…he calls our credit score an “I love debt score.” I have a goal to have NO credit score by the time I am 50 (should be long enough to not only be debt free but to have all the current stuff old enough to be off our report). He cites studies that show we will spend more when we swipe plastic (even a debit card) than we will if we are paying with cash. Spending cash triggers the ‘pain’ sensors in the brain in a way that plastic doesn’t. That means even if you pay off a card every month, you tend to spend more each month. (Maybe not you, but most people) Since almost every bill can be paid online, this leaves cash only for areas like food, clothing, etc. If you already have a budget, then you know what to withdraw in cash for each week/month/pay period. We are still recovering from selling a home at a loss (wiping out our savings) and back pain that kept me from working much of this year. We can’t wait to be debt free and never, ever want to use a credit card again. It is a hard mindset to change having grown up in the era/culture where it is the norm (wasn’t before the 70′s and 80′s.) http://www.daveramsey.com/new/baby-steps/

    Kudos to you for paying it off and giving us great examples of how to be frugal!

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  3. Meghan Baldwin

    11/16/2011

    I have to disagree – the only kind of debt that I would consider ok to have would be a mortgage. While paying off credit cards monthly might avoid interest and give you a good credit score, your credit score is nothing more than a relationship to debt score. With good savings habits, an emergency fund, and and savings fund with several months of income, the need for ever borrowing money can be reduced. It is also possible to get a mortgage without a credit score, if you use an actual underwriter (though, these actual underwriters take some effort to find). I usually love your blog and am challenged by it, but today just have to disagree! :)

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    Andrea Reply:

    Thanks for your input Meghan — totally fine that you disagree :)

    However, I would just like to mention that Dave and I DO have good savings habits, a very healthy emergency fund, and could easily live for several months {if not an entire year} off our savings. We simply choose to use credit cards as a major convenience factor. It saves us a bunch of time and hassle, and we get loads of rewards points and cash back every year.

    I agree with you that debt is NOT cool, but for us, paying off our credit card each month is not really considered debt because we have the cash in the bank to buy anything we need — it’s just not in our wallet :)

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  4. Mae @ WoFin Blog

    11/16/2011

    Okay, in an IDEAL world no one would have debt (because technically debt is something you owe and its best to have assets not liabilities, especially ones charging interest). In the real world, I know that unless you save enough money to buy your house, car, education, with money from your savings you are going to have debt. Good debt vs Bad debt I just wrote an article about your credit score & your debt on my own blog.

    http://wofin.wordpress.com/2011/11/15/factors-affecting-your-credit-score/

    Let’s just say the reason you need some debt is because of your credit score. Before, I had a credit card I paid for everything cash, and my score was so low and I kept thinking I am such a mighty saver, pay every bill on time, doesn’t anybody know this I am responsible my is my score so low. But the bank/credit agency doesn’t know. So, I took out a small credit card ($500 limit) and I charge my monthly gas or small purchase ($50 +/-) every month. I always pay in full, and let me repeat this IF you pay in FULL every month it does NOT matter what the interest rate is on the credit card. I would never pay interest charges for a purchase I can afford, and would never charge anything I can’t pay off that month.

    Technically speaking, in the terms of credit scores/lending institutions Good debts are: secured loans, fixed rates (think a fixed rate mortgage) they also perceive student loans as being good because of the low interest rate. Bad debts: are high limits on credit cards, unsecured loans, variable credit lines.

    I technically don’t agree with the fact that people start off their career with a lot of debt and have to spend so much of their income repaying back loans. I think people need to get through college quicker, with less debt in order to be working earlier.

    Debt is different for a credit score/lender than for the individual as it always feels better to own nothing to anyone. Student loans are an issue because people are taking on massive loans with falling starting salaries, as this continues the slower repayment of debt leads to more interest paid and less savings for the individual.

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  5. Kari

    11/16/2011

    Something to consider when you are paying everything on a credit card and paying it off each month, is what income are you using to pay it off? Are you using this month’s income to pay off last month’s credit card bills. Think of it this way. If you lost your job today, do you have enough saved in your bank account from last month’s paychecks to cover the credit card bill that will be coming that is associated with last month? Kind of confusing to explain, but important to consider!

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  6. Erica

    11/26/2011

    Andrea, you mention a number of times on your blog that you and your husband use a credit card for most things. I’m wondering what kind of credit card you use? I’m trying to find a card that has the best/really good rewards program. I’d love to know since I’m sure you researched it alot- and it will save me the time I would spend researching! Thanks so much, I really like your blog.

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    Andrea Reply:

    Hey Erica,
    You make me laugh!! I did do some research on different credit cards, but ultimately just picked the one that was most convenient for us!
    We don’t fly or travel very often, so we just wanted a card that offered Cash Back as the reward… simple but it’s our best option.

    We use a Meijer Platinum Master Card — and if you have no idea what that is, it’s because Meijer is a local grocery store in Michigan/Indiana. It’s a normal Master Card so we can use it anywhere, but since it’s specifically through Meijer — we get good discounts on groceries, gas, general merchandise items, etc. We also get cash back, 20% off Meijer coupons, and 1% of everything we buy with our card goes to the school my husband teaches at.

    So while this card is great for us, it might not be the best for you! I would say just look into a FEW different options and pick one. You can always change later :)

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  7. Heather

    03/02/2012

    We too use 2 credit cards to pay for almost everything each month, but also pay it off in FULL every month. I look at it like this- I could pay cash and buy an item/service or I could use my credit card to do the same thing and receive FREE money for using my credit card. For us, it simply makes sense to use a cash back credit card. Example: gasoline is a purchase our family must make weekly. (We live in the country on our farm and my husband also works off the farm.). If we pay cash for the gasoline then we get nothing back, but by paying with our gas card, we get back 5% back. Plus, with the OUTRAGEOUS gas prices, 5% adds up quickly!
    A few Christmas’s ago, I used the Cash Rewards from the gas card to help out with Christmas gifts. It covered over half of the budgeted amount for Christmas gifts!
    The thing to remember is that the ONLY way that using credit cards for purchases monthly can be benefiticial, is to use one that gives you cash back and to PAY IT IN FULL when you receive it.

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