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Good Debt vs. Bad Debt

Good debt helps you build assets that produce income. Bad debt drains your cash without providing future value. Let's take a closer look at various types of debt, and which ones are "okay," within reason.

Good Debt

• Home Loan. A mortgage loan is generally considered good debt. Property is a good investment when it appreciates in value. Mortgage debt is particularly good for those who buy bargains, fix them up, then resell at a profit. Mortgage interest can be tax deductible,* giving this loan another advantage. Read more about Home Loans
• Student Loans. Student loans are also considered good debt. College graduates earn 73% more than high school graduates, and advanced degree holders earn two to three times more than those with a high school diploma. Interest on student loans is generally deferred until 6 months after graduation, and interest can be tax deductible.* Read more about Student Loans

Bad Debt

• Vehicle Loan. Vehicles tend to depreciate over time, especially those shiny new ones driven off the lot. Most new vehicles depreciate 20% in the first year, putting these loans in the bad debt category. However, sometimes this "bad debt" makes it possible for you to produce income, for example traveling to a job where you earn more money. (Could you take a bus to a similar-paying job?) You may justify having this debt, but you can probably get to work in an economy car just as easily as you can in the luxury vehicle of your dreams. Read more about Vehicle Loans
• Credit Cards. It's no surprise that credit cards fall in the bad debt category. If you carry a balance from month to month, you're paying more for your purchases than the original price tag. Some experts say you're paying up to three times more, if you only pay the minimum balance due each month. Items purchased using a credit card generally depreciate in value, so you're taking a double hit on this purchase.
• Credit cards can also be valuable tools to help meet short-term and unexpected needs. For example, it might be wise to take advantage of a limited-time sale on new car tires, knowing that you will payoff the card balance next month with your tax refund. The key is to match the purchase with a source of repayment. This "bad debt" turns into "not-so-bad debt" when you pay off your balance each month!
  Read more about credit cards

How to Eliminate Debt

• Limit Spending. The simple solution may be the most difficult to act upon-limit spending and start saving. Here's a tip: while shopping, categorize everything as a "want" or a "need." If the item falls into the want category, put off buying it. (You may not even want it later.) If the item is truly a need, determine whether there is a less expensive alternative. This exercise doesn't have to hurt. Make it a game. Figure out how much you save on each purchase, then brag about how wise you've become (even if only bragging to your cat).
• Home Equity Loan. If you own your home, consider getting a home equity loan to pay off your bad debt. Caution: Using this loan to pay off bad debt shouldn't open the door for you to rack up more debt. (Our home equity loans are even better than most, since we don't charge annual fees or closing costs, and our rates are among the lowest you'll find anywhere.)
• Consolidate Credit Cards. How many credit cards are in your wallet? What rate does each charge, and what are the fees? If you don't know the answer to these questions, find out. Then consolidate balances onto the card that offers the most benefits to you. For example, if you carry a balance from month to month, the card's interest rate will be an important feature. Pick a card that carries a lower, fixed rate. If you don't carry a balance, pick a card that offers rewards or other perks, like a 25-day grace period or online account management. UW Credit Union offers both a low rate and rewards. (If you don't already have a UW Credit Union credit card, you owe it to yourself to check out our card.)

*Consult tax advisor.