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| Education and Financial

06/01/14

Debt consideration: Why some debt still considered good

Even if you don't consider yourself a financial wizard or guru, you've undoubtedly heard the phrase "good debt."
This phrase suggests that owing money isn't necessarily a bad thing, and that sometimes debt itself can be positive. To a degree, that sentiment still rings true with the masses, but still must be contemplated and considered with great caution before any borrowing or buying takes place.
Too often good and bad debt is blurred by bad decision making by the person at the helm and backed by convincing yourself that what you're doing makes financial sense.
Take for instance a large scale furniture purchase or selling out to buy that superb flat screen TV. You might talk yourself into thinking that these buys are equal parts necessity and prudent. You have to sit or lay down right? And as long as you're getting cozy on that comfortable couch, why not park it in front of a 50 inch television?
If your TV is broken, buy a new one. If your furniture is ripped or you're falling into your couch, then buy something new. But that doesn't mean you should be using a 30% interest rate to do so. That's not bad debt; it's downright awful.

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The same could be said for deciding that you need some new clothes and using a department store credit card to go on that impromptu and ill advised spree.
Good debt isn't difficult to spot.
It's about buying a home, owning a vehicle or borrowing money to go to school. Those debts are done with intent and purpose, and would be considered more investment than whim. Even the car should fall into the "good" category if for no other reason than you should buy one with a good resale value and because you need to be able to get from point A to point B.
Another positive of debt is being able to build credit and show current and would be creditors that you can pay back what you borrow. Far too often, however, consumers feel like amassing massive amounts of debt is perfectly fine as long as they're paying something toward it each month.
That may be true, but you also have to consider your debt to income ratio as well. If it's lopsided or not really in your favor then the debt goes way beyond just bad. It's actually hurting your chances to own a home or borrow money. Banks wants to see a debt to income that is 60-40, not 50-50.
While you think long and hard about how you spend your next dollar, try to consider exactly how the purchase is going to pay off in the long and short term. If you honestly can't determine the outcome, then it's always a safe bet to bow out of the borrowing.

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