Understand Good and Bad Debt

An excerpt from Managing Your Debt from CUNA

While some debt is okay, too much debt is not. So, how do you know whether you have too much debt or not? First let’s look at two different kinds of debt we might incur.

1. Investment Debt

First, there is investment debt, such as the debt incurred to buy a home (mortgage) or to start a business. Generally, this kind of debt is used to purchase assets that when liquidated will provide cash to repay the debt, or will provide income or have use value over the life of the loan that offsets the debt repayments. For example, if you borrow money to buy a house, you will have the use of the house that offsets any rent payments you might have had to pay for other shelter.

2. Consumer Debt

Consumer debt is the borrowing of money to buy things that decrease in value with use or over time. If you borrow money to buy a car, clothing, holiday gifts, etc., you are using consumer debt. Consumer goods generally become worthless over time or with use. They are consumed. But the debt remains.

3. Manage What You Have

While investment debt can be healthy for your overall financial health, consumer debt can pull you off-track. The trick is to minimize your consumer debt, know how much you can handle, and make a plan to manage your debt in the context of your overall budget and goals.

The statements and representations contained in this document are intended to be educational in nature. They are not designed to be interpreted as investment advice.