Good Debt vs. Bad Debt

Debt plays a big role in personal finance in the United States. But if its not used correctly it can lead to personal financial disaster. Some financial advisers suggest avoiding debt completely and proclaim it to be evil. However, if you are smart about debt it can actually help you increase your wealth.

Here are some of the differences between good debt and bad debt.

Good Debt:

• Used to buy things that can increase your net worth (real estate, a small business)
• Frees up your cash every month to invest in high interest savings accounts (as long as you pay off your entire balance each month and do not pay interest charges).
  
• Rewards each of your transactions with points or cash back
• Used to pay for education that increases your earning potential (student loan for a law degree).
  

Bad Debt:

• Decreases the value of your net worth.
  
• Eats up your monthly cash flow with interest charges.
  
• Used to purchase depreciating items that you can't currently afford (computers, cars, clothes, dining out, vacations).
  

If you are using a credit card on a regular basis, you need to make sure that you have cash to back up every dollar that you spend on a credit card. Remember, you are using the card as a tool to build equity, not to purchase things that you can't afford.