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Good Debt vs Bad Debt

I thought all debt was bad? Well Not necessarily

Good Debt

Debt can be “good” or positive if it helps you to purchase wealth building assets.  Wealth Building Assets are those that are likely to provide an income and/or grow in value over time.  Good debt may also be tax deductible.

A common example is borrowing money to purchase a home or investment property, which all going well, will appreciate over the long term.  You can also borrow money to purchase shares/investments.  This is commonly referred to as margin lending.

In the Investment property, or margin loan example, if the earnings derived from rent or dividends are lower than the loan repayments, the investor may be entitled to a tax deduction.

Bad Debt

Debt that is described as “bad” or detrimental for your wealth if it is used to buy assets that will decline in value, won’t earn you any money and are not tax deductible.  A common example of bad debt is using a loan to purchase a car which will almost always decline in value.

Alternatively using a credit card or personal loan to fund things like holidays or luxury goods is another example of bad debt.

What about my Credit Card? 

If you are disciplined and pay off your credit card debts each month, a credit card can be a useful tool for managing cashflow.  That said, banks and financial institutions continue to be increasingly clever at tempting clients with rewards programs, frequent flyer points and other promotional offers to lure consumers into increasing their monthly credit card spend.  A good rule might be that if you wouldn’t be prepared to pay cash for an item, don’t pay for it with your credit card. 

Source: Commsec.com.au

This website contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.