Good Debt vs. Bad Debt

It's far too easy to spend more than you can really afford. Credit card debt is a good example of this. According to CardWeb.com, the average U.S. household carries about $9,200 of credit card debt. Avoiding all debt is not smart either if it means exhausting your cash reserves for emergencies. The key is learning how to judge which debt makes senses and which does not along with wisely managing the money you do borrow.

Good Debt

This includes anything you really need but can't pay upfront without exhausting your cash reserves and all your investments. A mortgage on a home is a good example of this. Essentially, debt makes sense when you take out loans for which you can afford the monthly payments.

Bad Debt

This includes debt you have taken on things that you really don't need and really can't afford. Expensive vacations, a new jet boat, etc would be included in this. Credit card debt is the worst form of debt and credit cards usually carry the highest of interest rates. Credit card interest rates can easily be in the mid-teens and more.

If you think you can receive a higher return from investing your cash than what you will pay in interest on a loan (high credit card rates), borrowing a small amount at a reltively low rate may make a lot of sense.