Good Debt versus Bad Debt

by Jeff C. Johnson

Debit card

Bad debt seems like an American weakness. It is high-interest, non-tax-deductible, and used to pay for things with no value or of declining value, such as clothing, accessories, entertainment, and vacations.

I believe Americans have been lured into living consumer-oriented lifestyles, as if buying and owning the right stuff will make them happy. Possessions rarely make anyone permanently happy, and as with other addictions, an addiction to possessions leads to bigger and bigger spending. Spending leads to debt; sometimes it leads to unmanageable debt.

Bad debt is produced by purchasing goods and services using a credit card, store card, or some other kind of borrowing tool. Again, these purchases are items that have no monetary value or will lose value over time. The interest rate charged on bad debt is often in excess of 18 percent per year! And to make it worse, the interest expense is often not deductible for income-tax-reduction purposes.

Good debt, on the other hand, is used to make purchases that could increase in value or create more income or profit than the cost of the interest charged on it. Because the purchase can add economic benefits over the long term, the interest charged is much lower and usually deductible against your income at tax time.

Typical good debt is used to purchase a home, a business, or an education that will benefit a student over a lifetime.

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