Misuse of credit can destroy a family’s financial life. A household can crumble under the weight of debt, whether it has increased from a poor house-purchasing decision, a drastic change in the real estate market, a shopping addiction, an unexpected medical bill, or the lack of preparedness for an emergency. It’s no surprise people consider debt to be “bad.”

Is there any situation where debt can be “good?”

I have a problem with the good debt vs. bad debt argument. Good and bad are polar opposites, and most issues tend to sit somewhere on a spectrum between two extremes. In fact, issues don’t often sit; they can shift position. The requirement to declare anything, particularly “debt” as a concept, as either good or bad is oversimplification. There’s a tendency to want to make issues simple. Catchy soundbites reducing issues to the most basic terms attract people, and no one ever won a Presidential election while talking about nuances.

People who are looking to sell you something, like car salesmen, college recruiters, investment professionals, and real estate brokers, are more likely to be willing to point out how debt can be used effectively.

• In real estate transactions, debt allows more families to afford a house, and in some cases, that could mean a healthier environment for raising children. Leverage also helps you reflect a higher rate of return if your home value increases and you decide to sell.
• If you can borrow money at a low interest rate and use that cash to invest at a higher rate of return, you are using someone else’s money to benefit yourself financially. You can pocket the difference in interest rates or rates of return.
• Getting a college education increases your lifetime earning potential, and going into debt for a bachelor’s degree could pay off.
• If you work in a career where image is important, a higher-priced and otherwise-unaffordable car could help you succeed in your business.

Risk makes debt dangerous. There’s a risk that house prices go down. Since the housing bubble burst, that risk should be more apparent. Leverage may amplify your return, but it also makes losses more severe. You could lose your house. If your hot investment doesn’t pan out, you might not be able to pay back your borrowed money. If you find yourself in a career not earning much money, you could struggle to pay off your student loan debt. Using debt to focus your image doesn’t always pay off.

You can only determine whether a risk, like borrowing, is worthwhile after the fact. Hindsight provides perspective. If borrowing allowed you to triumph financially, it was “good” debt. If the debt was unmanageable or caused financial ruin, it was “bad” debt. Taking on debt to purchase an asset that increases in value would always be “good,” while using debt to finance an asset that decreases in value would always be “bad.” The problem is being able to accurately predict the future. The assets we hope will increase would be a house, an investment portfolio, lifetime earning potential, and career opportunities.

The determination of whether debt is “good” or “bad” also depends on the individual or household involved. What could be a good use of debt for one family might not be a good use for another.

There are often other options rather than increasing debt. While it may be expensive to attend an out-of-state private college, you could save money by enrolling in an in-state public college or by taking advantage of grants and scholarships. The Consumerism Commentary Podcast interview with Zac Bissonnette, author of Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships, or Mooching off My Parents, can offer more insights on how to obtain a valuable college degree without going into debt.

If you are able to postpone desires until you’ve diligently saved for a purchase, you can avoid debt and its possible pitfalls. Not everyone has the opportunity to save, though. A college graduate without any money might need to buy work-appropriate clothing in order to get a job. The credit card comes out, and she buys a week’s worth of outfits to get her to the first paycheck. This may not be “good” debt, but if she didn’t earn and save enough money while achieving her degree, it could be a short-term necessity.

Then again, another way to look at this need for credit to prepare for the first week in a professional environment is an excuse for not following a solid financial plan over the course of her higher education and the start of her life as an adult.

In another example, a savvy investor could use borrowed money to invest in a business that succeeds. Financial analysts can often determine whether a risk is acceptable, and individual investors can use the same approach. For example, if you could borrow a sum of money at an introductory rate of 0% APR on a credit card for 12 months with no fee, as new customers of this Discover More Card offer can do right now, deposit that in a savings account with 1% interest, you can keep the proceeds as long as you pay the credit card bill on time each month and in full by the end of the introductory period. Back when interest rates were higher, this “credit card balance arbitrage” was a more worthwhile endeavor.

Today, however, most investments that would make borrowing money from a 0% APR credit card worthwhile are riskier than a savings account. Even when the safe interest you could earn was more favorable, there was always a risk of missing a credit card payment and owing penalties and interest to the issuer. If you completed the arbitrage scheme and succeeded in increasing your bank account balance, you’d consider that debt to be good. If not, the debt would be bad.

Do you believe that all debt is bad debt, or are there some situations where it’s worthwhile to pay interest and accept the risk of defaulting?

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This article is by Consumerism Commentary staff writer Smithee, who is juggling about a dozen clients and creative projects as a freelancer.

It’s been a year since I was laid off and decided to become a full-time freelancer, and it’s been six months since my wife and I made a risky decision to move the family from Dallas to San Diego. Overall, we think moving was the right thing to do, but there are a few things keeping me anxious.

I’m writing this update from the Starbucks near the house we’re renting in San Diego, because Starbucks has air conditioning, and the heat and humidity in the house were too difficult to ignore. The good news is that today is only about the tenth day that it’s been too hot in San Diego since we moved back in April.

Productivity

As I hoped, moving to a place with nice year-round weather has had a good effect on my ambition and productivity levels. Some people like warm weather, but I found that Texas’s six-month-long summers would infect my outlook and attitude, creating tense and downright depressing work relationships.

In addition, working for myself means I can create my own hours and I’m not suffering from road rage or dealing with the rising gas prices. To be fair, though, San Diego’s rush hour is literally only an hour long, which is a level of sensibility I never saw in New Jersey, Seattle, or Dallas.

Most days I even have enough time in the morning to sit down and eat breakfast outside, which is part of my American dream.

Moving is expensive

Including fixing up the old house, packing, storing and moving all the stuff, animal medicine and drama, paying an agency to rent out our house in Dallas and $4,600 for the first & last months’ rent plus a security deposit in San Diego, moving wasn’t something we could do with cash on hand. We’ve created over $10,000 in credit card debt for the privilege of living somewhere better, and it almost always seems like the right decision.

Long-time readers might remember that I spent over a decade with thousands in credit card debt, before I finally buckled down and, with the help of a respectful salary, wiped it out over about nine months. I hate credit card debt, and knowing those balances are out there building interest against me causes some anxiety. The silver lining is that the “San Diego debt,” unlikely my legacy solo debt, is something that my wife and I are both contributing toward reducing, so it should go away that much more quickly.

The best part about our move (financially speaking) is that we’re saving at least $200 a month on air conditioning, which is the same amount more that we’re paying for housing. If we didn’t have to spend so much on rent deposits and agencies, it’d basically pay for itself. Over time, it will.

Debt reduction strategy

We’re not really reducing debt in a meaningful way, yet. At the moment, my wife has the big dependable salary. My work sometimes generates large paychecks, but freelance work is not reliable, so I’ve been spending more time finessing and futzing with each month’s household budget instead of putting payments and savings on auto-pilot.

I’ve been using the 50/30/20 guideline, and in the months where I have large freelance income, we’re able to save quite a bit. I know what I’m supposed to do is keep saving until we have three months’ worth of emergency savings available, or put it toward credit card debt and then build emergency savings.

What I want to do is use it to pay off the car loans early. One is on a schedule to expire in January, and the other one in June of next year. They add up to over $1,000 a month, and unlike the credit card debt, they always require the same regular payment amount, or else bad things happen.

In fact, once the car loans (and the old IRS installment) are completely paid off, we could fulfill all of our “needs” (the 50 part of 50/30/20) with just my wife’s salary. If things go the same way they have been, and if there aren’t any expensive emergencies, isn’t it smarter to free up $1,000 a month for saving or debt payments?

That’s the trick, isn’t it? You’re supposed to assume there will be emergencies that require you to have saved up a lot. I’ve never had that much saved in my life, but I’ve also never been hit with a truly expensive emergency, and I am impatient to be out of debt.

Photo: robsettantasei

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