Good debt is generally regarded as borrowing that helps you generate income and increase your net worth; however, even good debt can have its downside.
Borrowing for a College Education can be good, because the more education an individual has, the greater their earning potential. Better educated workers are more likely to be employed in higher-paying jobs, and tend to have an easier time finding new opportunities.
Education is not a guaranteed ticket to wealth and success. Choose your field of study carefully, lucrative career opportunities may be more difficult to obtain during economic downturns and those unwilling to relocate or unwilling to accept low-paying, entry-level jobs may find their degrees don’t deliver the expected returns.
Investing in a small business will provide an income. By becoming your own boss, you reduce your reliance on others to hire and pay you and your earnings potential can be directly improved by your willingness to work hard. However, small businesses can fail. Hard work, a good game plan and a little bit of luck may be necessary for success.
Retail or commercial property investment was widely regarded as an excellent source of cash flow and capital gains for investors and buying property seemed like a guaranteed win, as price appreciation over time was the norm. Downward fluctuations in property prices have taught us that price appreciation is not guaranteed, whereas property taxes, rates and maintenance costs are permanent.
Certain debts are just bad, such as all debts incurred to purchase depreciating assets. Borrowing for new cars, in particular, costs a lot of money. Paying interest on a car loan is simply a waste of money. By the time you leave the forecourt, the vehicle is already worth less than it was when you bought it.
Credit cards are one of the worst forms of bad debt. The interest rates charged are often significantly higher than the rates on consumer loans and the payment schedules are arranged to maximise costs for the consumer. Keeping a debit balance on a credit card is rarely a good idea.