Good Debt vs Bad Debt
It seems that we’ve been conditioned that all debt is bad. We’ve been taught to fear debt. But not all debt is bad debt. There is a difference – good debt vs bad debt. Understanding good debt, and utilizing it, is an essential part of attaining financial independence.
First, if the borrowed money (debt) is simply spent on consumption – a vacation, jewelry, or shoes that you charge on your credit cards – then that is bad debt. The car loan you write a check for every month is bad debt. Bad debt is debt that you pay for out of your own pocket.
Good debt, on the other hand, is debt that someone else pays for you. A good businessperson may borrow money to grow a business. It’s good debt if it is paid back out of the positive cash flow of the business. When you purchase rental property, you will most likely have a mortgage or loan on the property. If you manage the property well, then the rent from the tenant pays the monthly mortgage payment. That is also good debt.
So can a credit card be good debt?
Yes! Here is an explanation:
In 2008, a long-time Rich Dad employee, Flo, bought her first duplex in Buffalo, New York, on a credit card, typically considered bad debt. In 2012, she bought another duplex on another credit card. Both duplexes have positive cash flow – now this credit card debt is good debt. Is a credit card the preferred method of financing to acquire an asset? Depends. There are many risks to consider.
If you have no idea how to acquire good debt, it’s time to start your financial education. Acquiring good debt is just a matter of learning how to do it and taking action.