With all the information about how in debt the average American family is these days it can be easy to lose sight of the difference between good debt and bad debt. But there is a fundamental difference between the two. You can classify bad debt as loans for things that are not an investment in yourself, your family or your assets. Examples of this include:
Credit card charges for non-necessary or emergency items such as electronics -- flat screen televisions, iPhones, etc. -- brand name clothes or vacations that you could not afford to pay for with cash.
Installment loans on recreational vehicles -- fifth wheels, ATVS, boats, etc. -- that you only use every so often and must pay to keep in a storage facility.
Good debt on the other hand is debt that you take on that will add to your financial well being over time. Good debt includes things like:
Student loans taken out to increase your career potential -- although taking on significant debt to attend an expensive school vs. a less expensive state school is not a wise investment, as it will significantly hamper you financially for years after graduation.
A car loan for a moderately priced vehicle with good mileage.
A home loan for the purchase of a home that you will live in – provided that you have made a down payment of at least 10% and have taken out a fixed rate loan that you can comfortably afford on your current income.
A home equity line of credit where you use the money to improve the home – such as add another bathroom, upgrade the kitchen or renovate the family room or garage – which you will be able to recoup if you sell the house.
To determine how much good versus bad debt you have, make a two column list. Label one bad debt, the other good debt and list all of your debt based on the guidelines above.
