Good Debt vs Bad Debt

Good Debt​

Debt that creates profit. Debt that you use to put more money in your pocket. Good debt is investing in income producing assets. The major deciding factor of good debt vs bad debt is the use of debt rather than the tool.

An example of this is credit card debt. If you use a credit card to buy product for a business, that could be good debt if the products pay off the debt and put money in your pocket at a surplus.

The problem is not the credit cards, but how credit cards are normally used. Used properly credit cards can become great wealth building tools. Unfortunately, far too many people are not educated on credit.

Assets give you the possibility of two things,  Income or cash value. Some examples of assets are:

  • Profitable Business***
  • Equity in a Home
  • Income producing rental property****
  • Credit Cards used the right way
  • Credit lines used the right way
  • A job*****                                                                                                                                                                                                     

***A business is not necessarily an asset unless it is a profitable business. A business that is losing money could be the worst liability of them all.

****Rental property that brings in less income than it cost is not an asset.

*****Having a job works best when you live within your means. If you make $20,000 a year live like it, live like you make $20,000.

VS

Bad Debt

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Debt that does not result in profit. Bad debt constantly takes money from your pocket. Debt that invests only in liabilities. An example could be credit card debt used to purchase things that don’t make you any money or lose their value such as, appliances or electronics.

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  • Assets – things you own that either put money in your pocket or adds or sustains it cash value.
  • Liabilities – things you own or purchasing that takes money from you and loses it value.

Some common liabilities are:

  • House payments(Mortgage)*
  • Credit Cards used the wrong way**
  • Living expenses
  • Taxes
  • Rent
  • Automobiles and automobile payments

*A home can be a asset or liability. The equity can be considered an asset, as the payments (principal plus interest) could be viewed as liabilities. 

**Credit cards can be used to buy a lot things that lose their value.  Paying bills could be a great use for credit cards if they paid down or off in a timely manner.

Credit can be a great tool in your wealth building arsenal, but it must be used wisely. Knowledge is power. Once you learn better you have the potential to do better. Learn how to maximize the use of credit. 

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