The good, bad, and the ugly debt

Good and Bad Debt

by Robin Applegarth

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Not all debt is equal. Some can actually help you build financial security, while other debt can tear it down.

In the days of the Wild West, financial lives were simpler. What the cowboy (or cowgirl) needed was bought with what was in the pockets or by bartering. Now, we have many ways to purchase that include different forms of borrowing or delayed paying.

Let's start with good debt. It's good when it pays for things that can increase your net worth over time. (You must be able to afford the payments, of course.) Investing in yourself by borrowing for college or job training to earn more is good.

Good debt also includes using a low-interest loan to buy a home or business. In the dusty days of the early West, borrowing a small bag of gold coins to build a hardware store or saloon would have been a good business opportunity.

Neutral debt can be thought of as debt that is sometimes necessary, but doesn't build net worth over time. Borrowing to buy a car to get to work (a horse if you're a cowboy) or getting a line of credit for cash-flow needs of a small business are neutral types of debt. These "tumbleweed debts" are better avoided if possible, but may be necessary if you haven't saved up enough.

Bad debt is any debt at rates over 10% in a low-interest environment, or consumer debt you can't pay off each month. Spending $500 on a weekend trip and then paying for it over 10 months with a credit card at 25% interest is not good for your financial health. It may just turn that trip into a $600 expense. It's better to save for the trip and pay upfront, or don't go until you can afford it. Here's where a little "tough guy" strategy with your credit cards can help. Lock them away if you have to.

Many people get into serious financial trouble with bad and ugly debt. This can lead to a host of problems and worries. If you thought Clint Eastwood's character in the 1966 movie The Good, the Bad and the Ugly had it hard, compare him to today's debt-burdened consumers.

Ugly debt is using credit cards, payday loans, or home-equity loans to fund a lifestyle you can't really afford. With many credit card rates spiking into the 20-30% range, it's too easy to fall behind. Even if that borrowed lifestyle is modest, you're still running deeper into the red each week. That can feel like a noose around your neck.

If your spending has put you in debt, start taking the steps to financial freedom today!

If debt is choking you, look for debt-payoff strategies, and address the problem before it gets harder to fix. We have a Get Out of Debt Course right here on Also, you'll find a good article on how to determine if you qualify for credit counseling if you think you need individual help.

It's never too late to start good practices. Avoiding ugly debt is like staying out of the gun sights of the bad guy. And that can leave you riding off into the sunset with a smile on your face.

Reviewed September 2017

Robin Applegarth runs a website that helps women understand money.

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