Good Debt vs. Bad Debt

Despite the best of intentions, debt can happen anyway.

Consider the Restaurant owner who proudly claimed "I opened "Slop Shop" 15 years ago with $78 in my pocket. After years of hard work and sacrifice, look at me now. Today I'm $300,000 in debt."

All together now: "NOT ALL DEBT IS BAD!" Wealthy financiers like Donald Trump, Warren Buffett, and Henry Ford all battled debt problems before they made their fortunes. As the old saying goes, "show me a millionaire and I will show you a heavy borrower."

Debt only becomes a problem when you can't pay it off. For example, student loan debt can go from good to bad in a heartbeat. Plenty of things can go wrong that leave you in the lurch and unable to contribute to your loan obligation. Being young and right out of school, maybe you can't find a job yet. Common sense, specifically the lack of it, can come into play, too. Flush with your success at landing a good job, you blow off your student loan debt like an 8 a.m. anthropology class back at college. Why? Because you've got other fish to fry: dating, clothes, getting a good apartment, dinners, movies, happy hours. With all of that hoopla surrounding you, it's easy to overlook that $10,000 loan that put you in the position to be enjoying all of these perks in the first place.

But your student loans - like most loans - are no perk. They're an obligation and responsibility.

That's why it's always better to keep a regular schedule and pay your loan debt on time each month. Retiring the loan ASAP is the goal, especially if you plan to buy a home down the road. And, having a large loan debt - be it a car loan, a student loan, or credit card debt, which is a loan just the same - could make it that much harder for you to qualify for a home loan.

Credit Card Debt - the Silent, but Deadly, Wealth Killer

Using a mortgage to buy a home, tackling the rising costs of college with a loan, even borrowing money to buy a car - all are good debts with high return values.

But there are bad debts, too - debts that can limit or even prohibit your cleaning up your student loan debt. Of the bad debts, few are worse than credit card debt.

Simply stated, credit card debt can kill you from a personal finance point of view. Massive credit card debt can choke your ability to deal with all of your other financial responsibilities, taking over your life and limiting your ability to grow and prosper.

Sure, eating at a five-star restaurant or buying season tickets to watch the Tigers are worthwhile pursuits - if you can afford them with what you bring home in your wallet every payday. Using a credit card to finance these endeavors is a long-term loser, if only because most of the stuff you buy with credit cards depreciates rather than rises in value. Unlike other depreciable items, like a car that provides vital transportation or a pair of eyeglasses, which allow you to see, most things you buy with a credit card don't offer much to your personal bottom line.

From your personal financial perspective, any money that is earmarked toward your credit card debt is money that you can't use to free yourself from debt. That's the primary reason why credit card debt is invariably bad debt.

It's bad from a financial management point of view, as well.

Unfortunately, student loan debt, as mentioned above, and credit card debt are joined at the hip. For decades, credit card companies have targeted college students, offering them their first shiny new plastic card while downplaying the dark side of owning a credit card.

Well, that plan worked. Millions of young Americans who received their first credit cards in college (and millions more who didn't, but got them right after they graduated and landed their first job) have developed the nasty habit of using their credit cards with alarming regularity. In the process, younger Americans have put a real dent in their financial health.

There's a study published by New York State's education agency that reports 78 percent of college students carried at least one credit card while 32 percent carried four cards or more. Furthermore, 10 percent of students shouldered a credit card balance of $7,000. Another 14 percent owed between $3,000 and $7,000.

Breaking the Credit Card Cycle

That's why managing your personal finances - especially your credit card debt - is job one when it comes to squaring your debt picture.

While credit cards may be a necessary evil, when you're trying to free yourself from loan debt, they can be more evil than necessary. How so? Well, try paying off your mortgage debt or your car payments when your monthly VISA statement looks like the annual operating budget for Portugal. In many cases, the interest rate on credit cards is 16 percent or more; the interest you pay is not tax-deductible; and quite often the money you owe is for something you've already gotten the most use out of.

So pay it off.

But first, make sure the credit-card bill is accurate. Analyze the bill. Make sure it matches your receipts. Sometimes, when you sign on the dotted line, you don't double-check the amount of the purchase.

For example, amid the rush of holiday shopping, you might not have been charged the sale price for an item; you might have been charged twice for a single item; or you could even have been charged for an item purchased by someone else in line. It happens. If you notice a discrepancy, call your credit card issuer and dispute the charge.

Meanwhile, don't fall for any season's greetings from your credit-card company offering to lower your minimum payment or saying that, because you're such a good customer, you can skip this month's payment. That may sound enticing, but remember, the interest-rate clock is still ticking.

With all your holiday shopping, in addition to your regular expenses, suppose that your January credit-card bill is $2,500, a typical amount. If the annual interest rate is 18 percent, skipping January's payment could cost you about $38 in finance charges that will show up in next month's bill. No wonder the credit-card company is so nice.

We'll have more on the evils of credit card use - and how to avoid those evils - throughout the guide.

But the idea of credit card debt as one of the most sinister of "bad" debts is an idea you need to get into your heads - the sooner the better.

The Red Flags That Lead to Debt