Good Debt, Bad Debt, and Slaying the Debt Dragon

Most of the time debt for most people is looked at as a bad thing. If you find that month after month that you are carrying a balance on your credit card, generally this is bad debt. You need to hit the breaks and pay that plastic off, but of course there are good forms of debt as well.

Economists calls debt "leverage." Basically you take some of your own money, and a lot of someone else's money, and pay for an enterprise that you would not have been able to fund with just your own money. This would be considered "good debt."

Broken down, if you borrow money to invest in something that you believe will earn a higher return on your investment then it would be good debt. An example of this would be student loan debt. I don't care how much student loan debt that you have, it is still good debt. Can you imagine how much debt that a doctor is in by the time that they become a doctor?

Some people think that things like car loans would be a bad debt. This is wrong! For example, where I live the train fair into New York City will run you $20 a day round trip. We are talking $400 a month just to get to work. More if I decide to visit on the weekend. If I can get a car with a payment of $150 per month, gas at $100 and insurance at say $120 per month, and then my total is $370. So I save about $30 per month, and when I have to go to the office on the weekend it is ok because I don't have to spend another $20 to get there and back. This would be an example of good debt. On the other hand if I just bought the car for pleasure, Say I decide to buy a Mercedes, instead of a Honda/Ford etc. this then would be bad debt. Because it is more than I would need.

No matter what kind of debt that you have, whether it is good or bad debt, you should try to obtain the lowest interest rate possible to you. Credit cards average at about 18% interest, and there are some that are at about 22%. Depending on how your credit looks, you should be able to get your loans at 1%-2% over prime. This would place your interest rate somewhere between 5.5% and 6%. If your credit card company if charging you more than this. Give them a call, and speak with a supervisor. Let them know that you cannot continue to pay interest like this. If you have been a good paying customer with them, they can oftentimes lower the interest rate.

Ok, so you called the credit card companies that you deal with, and they now have you at the lowest interest rate that they can get you at. No what do you do? First you want to pay down the card with the highest interest rate. For the cards with the lower interest rate, you are going to just pay the minimum. Yes I am telling you to just pay the minimum. On the higher interest card, you are going to pay the minimum, plus what ever extra amount that you were paying on the other cards. This will help you pay down your higher interest card first, and this will help you to get out of debt much faster.

We all have debt. The important thing is having the knowledge to pay it down, and keeping the debt monster under control.