Generally, debt is broken down into two categories: good and bad.
The categories aren’t based on how you feel about taking on that debt, but rather how it affects your credit and your finances.
Good debts tend to have lower interest rates — capped at about 6% — while interest rates for bad debt tend to be higher. Good debts include mortgages, student loans, and business loans, while bad debts cover high-interest borrowing like credit cards, auto loans, and consumer loans.
At least, that’s traditional wisdom.
Patrice C. Washington says we’ve got it all wrong.
The author of “Real Money Answers for Every Woman: How to Win the Money Game With or Without a Man” doesn’t believe in “good” and “bad” debt.
Take student loans, for instance, which are generally considered “good” because of their relatively low interest rate and opportunity for return on investment in the form of a lucrative career. “That’s a ridiculous rumour,” she says. “It’s the only one you can’t discharge in bankruptcy!”
When people see a debt as good, she explains, it eliminates the urgency to pay it off. “The only good debt, I say, is the debt that you don’t owe anymore,” she explains. “The one where no one can take anything from me, I’m not being called, there are no letters in the mail — that’s how you live a peaceful life. Your mortgage and your student loans are debt just the same. There are other debts that you might prioritise to pay faster, but it’s not to say your student loan debt doesn’t count. It absolutely does, and it drives me batty when people say they just have good debt.”
Those debts you might prioritise paying faster might be what you’d otherwise consider “bad” debt, if you were going to make the distinction — expensive debt that doesn’t build any type of equity, like the lingering balance on your credit cards.
Ultimately, they’re your bills. If you’re comfortable taking on, for instance, a mortgage and considering it “good” as you pay it down in monthly installments you can comfortably afford, that’s what works best for you. But if the idea of owing someone — anyone — money gives you hives, you might want to take a tip from Washington and divide your debts into another two categories: “bad” and “worse.”