According to financial expert, Suze Orman, not all debt falls into the category of bad debt (though some may argue that by saying all debt is bad.) Orman says that "Knowing the difference between good debt and bad debt is the key to financial well-being."Good Debt is money borrowed to purchase an asset: homes or mortgage, education or student loans, etc. while bad debt is money borrowed to finance a "want" or a depreciating asset: cars, credit card balances, home equity lines, etc
Follow these guidelines to help you determine what qualifies as "Good Debt:
- The debt must be limited, without the ability to continue increasing (a revolving account, such as a credit card, is not limited, and increases as you add more to it).
- The debt’s interest rate must be stable, at a reasonable, predictable level.
- The debt must have regular payment amounts that are manageable within a budget, on time to avoid late fees and penalty interest-rate increases.
- The debt must have been acquired for a purpose that an average person would say was sensible. (A good test is whether you will be able to remember in six months why you have the debt — coffee drinks or CDs usually can’t pass this test.)
- The debt is incurred for something that can appreciate, such as buying a home or investing in a business.
