Good Debt and Bad Debt

There are really only two types of debt in my opinion.  There is good debt and there is bad debt. While there may be literally thousands of different products that actually create debt, they can eventually all be classifed into both of these categories depending on what the debt is for.

In my opinion every single debt product can be classed into either good or bad debt, with the differing factor being how the debt is used and what the return on the debt is. As with any transaction especially if it is a business related transaction, knowing the return on investment, is important. In the case of debt it can be even more important because the full return is not always linked directly to the debt.

The basic definition that i give for both is simple and for the most part linked to the return. Good debt, i would define as any debt that either directly or indirectly creates additional income or more profit then the cost of debt.  While bad debt i would define as, any debt that costs you money and shows no positive return and only costs you money.

Probably the most common example that can show how a form of debt can be classed as both good and bad debt, is that of Credit Cards.  To someone who has a credit card to the max, and pays the minimum payment each month, a credit card would be classed as bad debt. While for someone who only uses their credit card for there normal spending and can pay the full balance each month, a credit card would be consider good debt, as it means they can use their income each month for short term investment, or to offset a mortgage, which generates either additional income or decreased interest on another debt, without incurring any additional cost.

In the same vain as the above credit card example, a mortgage for a house could be seen the same way. If you have a mortgage for an investment property, and can positively gear the property, then this could be classed as good debt, as you are creating more income then it is costing. Although you may be able to still class it as good debt, even if you negatively gear the property, due to the tax advantages. However this would be something that would need closely monitoring because it could quickly become bad debt, if you cannot manage to make sufficient income.

I have found that using credit card’s can provide quiet a large benefit as good debt to create additional income. This can be amplified even more when using credit cards for business, as it can be very easy to gain additional capital for purchasing stock, on an as needed basis, and creating quick cash flow, without having to maintain as much stock, which cost money to store.

N.B. The opinions expressed in this post, are personal opinions and do not take your position into account, and should not be seen as financial advice.

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