Believe it or not, in this health-conscious world we live in, some people overlook certain dietary items. There is such a thing as good cholesterol vs. bad cholesterol. Good fat vs. bad fat. The extreme of one or the other is not healthy in any way. Well, the same can be said for debt!
In regards to debt, too often we misunderstand what is good and what is bad. Now as a homeowner, you have a unique opportunity to “up” your good debt portfolio and shed your bad debt.
Is there such a thing as “Good Debt?”
100% yes is the easy answer. In fact, let’s look at debt and what it means to our credit score first and foremost. Do you know the standard rule the credit bureaus use in terms of debt usage?
On credit card debt, the answer is 30% of the credit line. If your usage goes over that amount, your credit score will decrease. So from a credit score perspective, your usage of credit and what they deem as potentially bad debt can have a huge impact on future purchases and interest rates.
Bad Debt Examples:
- Credit Cards: Too many and use too much in carrying a balance. Plus they are NOT tax-deductible.
- Student Loans: These work as an inexpensive installment loan. In some cases, they can be tax-deductible, but typically there is no ability to change the payment amount. They do not have moving interest rates. High student loans carry a high cost with no alleviation.
- 1 Year Same as Cash: On the surface you believe you are doing a good thing. However, the first negative that the company will not tell you is that they are using a finance company to write the loan. When a company is viewed as a subprime lender, that decreases your score. You show immediately as having a full balance — and there’s a ding on your credit score. Plus if you don’t pay it off, massive interest has been accruing. This is also NOT tax-deductible.
- Auto Loans: Everyone has them right? Yes, but there is more than one way to buy a car. With auto loans, paying interest even a small interest rate on a depreciating asset (meaning losing value) is a lose/lose proposition. As a homeowner, you have the ability to buy a car or cars as a cash buyer and get a tax deduction.
The chart above does not illustrate the total, it is per credit card by age. The average homeowner has 6 credit cards, not counting department store cards.
These are just a few examples of bad debt. We could speak for hours on why you should never have a department store credit card, gas card, personal line of credit at the bank, or 100+ other examples. It is about choosing your debt wisely.
Good Debt Example — The One You Need!
You may have noticed that in this section it is one example, not multiple examples. The truth of the matter is your home is about the ONLY good debt on the market today. Here is why:
- First mortgage interest is tax-deductible (always consult your tax professional).
- Credit bureaus do not ding you for being at your max LTV! If you can get 80%, 90%, or 100%, you will not be penalized by the three bureaus.
- Taking cash out of your home is nothing like a cash advance. You will never pay 19% cash out rates like on a credit card. Plus, the interest is tax-deductible.
- You can reduce monthly expenditure or payments by 25%, 50%, or more by consolidating debt into a lower monthly payment. That is a good debt. By consolidating the debt, you have now improved your credit score.
Debt, like our calorie intake, is all about portion control. Our financial health short-term and long-term is equally as important as our physical health. There are numerous areas of bad debt, and so we encourage people to sit with our professionals and let us do a step-by-step assessment of your good debt vs. your bad debt. You may be amazed at how the savings impact your bottom line.