Is Debt Good or Bad?

Are credit cards good or bad? Is borrowing from the bank to pay off something a good investment? When is it called an investment if you’re incurring debt? Shouldn’t you treat it as solely as debt? Or is there something else out there that makes the most sense why people incur debt? Today we will discuss about borrowing money from banks and/or other lending agencies.

Some financial gurus hate the word “debt.” Some would go as far as advise you to literally cut your credit cards. You might ask, why to cut it up when you can just ask the issuing company to cancel your credit card. Assuming you’ve already paid off your credit card, then you’re good to go. 

Some financial gurus would advise the opposite. They would advice you to use credit cards to take advantage of their cashback, points, or any reward you can get just by using it. It should also increase your credit rating. 

Who should you follow then?

Good Debt vs. Bad Debt

There is such a thing as good and bad debt. Bad debt is buying a product or service that will not give you any monetary return. Examples of these are cars, gadgets, food or clothing. Generally, these items go down in value the moment you buy them. These are considered bad debt. Good debt is buying a product or a service that will generate your future income. Examples of these are buying assets to support your business. A truck for deliveries, a machine for your factory, a renovation of your house flip, or anything that will generate you a future income/profit.

The Only Reasons Why You Should Incur Debt

1. You’ll Use the Money for an Almost Guaranteed Return + Interest Earned

This is the best-case scenario of why you should incur debt. If you had only one reason why you should borrow money, this would be it.

But wait, how can you borrow money and earn from it?

Businessmen do this all the time. Instead of using their own money for their investments, they borrow money from the bank and use other people’s money to pay off their investments. It can be an investment in their own business, a mortgage for a new apartment complex where they’ll get more rent than their monthly payments, buy stocks which they’ll be paying off the next month when they’ve already sold out with profit, etc.

That’s why it’s called “Financial Leverage.” You’re using the money you don’t own to earn money you get to keep.

Great!

Do I need to take note of other things?

Yes, we want to emphasize the part “Almost Guaranteed Return” here. Just because you know you’ll earn interest from the investment, it doesn’t mean it’s going to happen 100% of the time. A good example is buying a house, you can get a mortgage. A house is a great investment, right? Because it will go up in value through time right? Yes and no. House prices generally go up in value over time but, but, but if that’s a sure thing why would you think twice?

What if you unexpectedly lose your job? What if you suddenly find yourself in a situation where don’t have enough money to pay off your mortgage? That’s how people lose their houses. You might have seen one. You might have seen more than too many.

2. It’s an Emergency and You Need the Money ASAP

There may be times when you’ll need more money than what you have.

3. You’re Trying to Build Up Your Credit Rating

Connected to the number 1 post, the rich use credit cards to increase and/or maintain their credit rating. Good credit ratings equal less incurred interest per borrowing. The basic tenets of making your credit rating good are to always pay your debt on time, keep the utilization rating low, asking for an increase in credit rating, getting more than one credit card, etc.

The rich people practically get an unlimited amount they can borrow from banks because they have been good with payments. They are trustworthy with money.

Conclusion

The next time you think about incurring debt, simply ask yourself this question,

“Would this debt generate me more income than what I have to pay?”

If your answer is “YES” then go for it! Otherwise, don’t!