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And even if they do specify, what makes that debt good and not bad? After all, consider someone who has a mortgage and currently owes more than what their property is worth.
Does this make it a good debt or a bad debt? (Or, as we call it here, a "naughty" debt)? Let's look at three different types of debt that can be good...
and explore what can make a good debt a naughty one.
Mortgage Often, a mortgage is viewed as a good debt.
There is an asset that typically appreciates in value over the long-term and since most people need a place to live, paying yourself (by investing in property) instead of a landlord (by paying rent) is considered a good thing.
But as we discussed in the example above, owing more on your mortgage than your property is worth turns a mortgage into a bad debt.
Given the uncertainty in today's labor market, owing more than you own restricts you in terms of employability -- you are less likely to sell your home if you know you cannot use the proceeds of that sale to repay the mortgage.
Naughty Factor: Low (or no) equity mortgages are considered naughty debts.
The more equity you have into a mortgage, the better.
Credit Cards While typically viewed as naughty debts to have, credit cards do serve a good purpose if used wisely.
And we all know how to use credit cards wisely -- by paying off the balance before the interest-free period expires.
This is actually easy to achieve...
if we control our spending.
And even if we cannot control our spending, we can control how much trouble our credit cards can get us into.
Naughty Factor: Having too much of a credit limit on our cards is an invitation for trouble.
Since everyone "needs" a credit card, keep the credit limit low enough that you can repay it with one or two pay checks, especially if you are not a good credit manager.
Consolidation Loans Consolidation loans are often "good" debt IF it improves the overall cost of borrowing on the total debt and simultaneously improves cash flow.
However, this is not often the case given a series of unfortunate realities (rates are usually higher because credit has suffered and the payments are higher as a result of higher rates and shorter terms).
By using consolidation loans appropriately, people should be able to improve their personal financial well-being.
Naughty Factor: Taking out a consolidation loan as a band-aid solution to rising credit card debt will only result in additional credit problems down the road.
Stay off the naughty list by closing all revolving credit when you get a consolidation loan and see the loan trough to the end of the term.
Summary Clearly, most types of debt can be both good and bad.
What makes certain types of debt "naughty" will depend on how the borrower uses that debt vehicle and how they change their behavior as it relates to debt.
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