When many people plan to buy a house, they know part of the plan will be to get a mortgage. After all, not many people have the money to pay cash for a house. They think that a mortgage is good debt, because the value of the house will be increasing while the amount they owe on it will be decreasing as they pay the principal.
Mortgage Debt Is NOT Good Debt!
When houses were appreciating, as long as you were paying down the pricipal, that was a good thing. However, as we have seen with the past recession, and are still seeing it, is that home values are plummeting. One in four homes in America are underwater, which means the owner owes more on the house than it is worth. This is why auto loans are considered bad debt: you have a depreciating asset that you owe money on.
Okay, Well Then, Isn't Student Debt Good Debt?
No so anymore. The average one-year tuition is around $40,000. You better major in something other than Aztec Folklore so you can get a decent paying job when you graduate. The rule-of-thumb is to never borrow more than your first year's salary; otherwise, it's difficult to pay it back. Remember, student loans and tax liabilities owed to the IRS are two things that cannot be discharged in bankruptcy.
There's Gotta Be Some Kind Of Good Debt
If you can borrow money to make money, then you have good debt. Financial Planner Robert Pagliarini has a great scenario with a piano: if you give piano lessons, buy the piano with debt because the piano can generate income while you're paying off the debt. If you save up to buy the piano, you're foregoing income that you would have otherwise earned. This is what businesses do.
Also, while credit cards are not considered good debt, they can help you establish a credit history. If you pay your balance off each month and send the check to the credit card company on time, you'll establish great credit history. Also if you keep your balance below 20% of your limit, you will achieve a great credit score.
If you can't pay it off, it isn't good credit. Do you have any examples of good credit? If so, let us hear from you.