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Tuesday, June 17, 2008

Good Debt Bad Debt

From The Hoss's Mouth


The last issue of Hoss Cents Free Financial Money Magazine made it clear that The Hoss does not recommend going into debt. However, The Hoss understands that unless you are a pro athlete, or you have inherited a fortune, or maybe won the lottery it will be almost impossible for you not to borrow money at various times throughout your life.

Hoss Cents Free Financial Money Magazine Success Tip

Before you incur any debt, you must fully understand the difference between good debt and bad debt. Not unlike knowing a good horse from a bad horse.

GOOD DEBT:

  • Any debt that's used to buy an asset that will increase in value over the time of the loan.
  • A mortgage used for the purchase of or remodeling of a home.
  • Student loan for college (the value of an education is immeasurable)
  • Provides a tax benefit

BAD DEBT:

  • Any debt that's used to purchase an item that depreciates overtime.
  • Car loan
  • Credit card debt
  • Vacation loan
  • Let's make it easy to understand: ALL other loans are bad debt. Period.

The worst debt of all is credit card debt. Do not use your credit card to finance the purchase of personal or household items such as clothing, shoes, food, furniture and TV. These are all bad debt, just like placing a bet on a horse running on a dirt track when that horse specializes running on a grass track; you're going to lose.

If you currently have any credit card debt, you must take the necessary steps to eliminate this debt as soon as possible. If you have more than one credit card, get rid of all but one. That credit card must be the one with the lowest interest rate.

The Hoss wants you to understand that credit cards, when used properly, can be an excellent financial tool--they can be used to establish a credit rating. Proper use means paying the balance on or before the due date. ALWAYS.

The Hoss and Mrs. Hoss have only one credit card each. Why, you may ask, do we carry a credit card at all? We find them convenient to use when purchasing a high ticket item, because it reduces the need to carry a lot of cash. We ensure any charges on these cards is paid in full before any interest is generated. An added benefit of paying credit charges on time is that you will establish an excellent credit rating.

The Hoss has made this definition of good debt and bad debt very simple because it IS very simple and can be summarized as follows:

Good Debt = Appreciating Asset

Bad Dept = Depreciating Asset

Stay on track,
The Hoss

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