The Myth Of ‘Good’ Debt

April 30, 2012

in Tips

The Myth Of 'Good' Debt

Prior to the Great Recession, many financial experts differentiated between “good” debt and “bad” debt. The former included loans with low interest rates, such as a home loan. Because the value of a home presumably appreciated over time, the debt helped the borrower work toward building wealth. “Bad” debt included credit card loans, or loans taken out to pay for things that current cash reserves couldn’t cover. The value of the product purchased with the credit card immediately depreciates upon purchase, while the money placed on the credit card immediately begins to accrue interest. But according to author David Bach, the financial downturn changed these perceptions. Debt now seems to fall into two new categories: better debt and worse debt. Better debt is a loan with a low interest rate used to purchase something that adds value. Worse debt is used to buy a depreciating asset or debt used as a substitute for cash. A home loan, according to Bach, is an example of better debt. [Read this article]

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