Good Debt vs Bad Debt

I think everyone knows what bad debt is. Bad debt is when you buy something like a toy, vacation or anything for pleasure with money you don’t have. The whole American society and economy has been pushed along in large part due to a culture of credit consumption.

Bad debt is the opposite of wealth. Even some people who have high salaries can never really become wealthy because they get into more debt and spend more as they earn more.

Credit cards are generally bad news, unless you pay the full balance each month and not get stuck paying interest. Some credit cards offer bonuses like frequent flyer mileage, cash back and other things for making purchases. If you pay the balance in full each month you can actually make money by using these credit cards.

Good debt is when you buy something on credit that puts money into your pocket or can potentially put money into your pocket like real estate, businesses or websites. The key thing to look at is cash flow. If you take out a loan to buy an asset and have a monthly loan payment of $200 but the asset you bought makes $250 per month then you have good debt that puts money into your pocket.