More talk on the good-debt-bad-debt question:
A few people have labeled me risk-averse when it comes to debt, and that's all right. I'm still of the opinion that it's a really good idea to pay off any debt you have faster than you “have to” with regard to minimum payments or amortized payments. Many of the “good” debts mentioned in the article have some big assumptions associated with why they're good debts:
- Student loans. Good debt if there's a clear payoff for the education you're financing. Will your chosen field be in demand long enough for the payoff (or even the payback of your loan) to happen?
- Home mortgage. Good under most traditional circumstances because you eventually own your home. If you're paying more for your mortgage than you would to rent, though, is that still good debt? Are you so far away from work that you're going to have to endure a wallet-ectomy every time you gas up for your daily commute? Is it possible your home might not appreciate but could in fact depreciate, leaving you upside-down on your mortgage?
- Business loans. Good debt if it helps you to make money. Really bad if your service or product is no longer needed and you still have the loan.
- Loans to purchase high-yield investment. This really isn't a good idea for most people in a lot of circumstances. Investing has enough risk without taking on more debt to play the game. The investment you buy may go up or down, but you still owe the guy you borrowed from regardless!
Deductibility of student loan interest and mortgage interest doesn't by itself make debts good. All it does is reduce the effective rate you pay on the loan — and with the mortgage interest, only if you itemize your deductions. Even being able to deduct the interest in the first place is an assumption. Who's to say that these deductions will be around forever?
At least I agree with most of the “bad” debt definitions: credit card debt and debt on a new car or other depreciating asset. Here you're upside down (owe more than the thing you bought is worth) the second you swiped your credit card or signed on the dashed line.
If credit cards are the greatest source of bad debt, auto loans are a close second. You are upside down on the loan the second you drive off the dealership's lot and it's downhill from there. Too many people shrug off a car payment as a necessary evil.