New and Noteworthy

New and Noteworthy

Debt on the Rise, but is it Good Debt or Bad Debt?

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Almost everyone has some debt. Whether it’s from student loans, car payments, a mortgage, furniture payments, medical bills, or  credit cards, debt is a fact of life for almost all Americans.

And while experts will argue about the virtues of “good debt” versus “bad debt,” the fact of the matter is the average credit card debt and the average college debt are on the rise, and can take their toll on American wallets.

Above-Average College Debt

When the economy started to turn for the worse in 2007, many professionals turned to education as a way to get an upper hand in the job market, but with higher education, can come higher monthly debt payments.

According to The Project on Student Debt, in 2008, the average college student graduated with around $24,000 in student loan debt. In 2004, this numbers was roughly $18,500.  

This increased debt can make it harder for households to keep their heads above water, and can push families to use credit cards to maintain their standard of living.

Average Credit Card Debt Rising

According to CreditCard.com, the average American household with at least one credit card has roughly $15,700 in credit card debt.

And this debt may continue to grow. The United States Census Bureau reported in 2010 that American citizens have roughly $866 billion in credit card debt, and projects that the number could be as high as $1.177 trillion by the end of this year.

This is a disturbing trend, but is all debt created equal?

Good Debt or Bad Debt?

The prevailing knowledge in the debt community had always been that an individual’s total monthly long-term debt should not exceed 36% of their monthly income, but it does not take into account the fact that there could be different kinds of debt – good debt and bad debt.

Debt reduction and budgeting expert Dave Ramsey believes that the concept of “good debt” is an oxymoron. His philosophy, and what he has made a career preaching, is that using debt as a means to gain wealth will not work. He argues that making every effort to pay off debts, and then putting the money that would have been used for a car payment or a minimum monthly credit card payment into saving for retirement is the best way to manage you money and make that money work for you.

Oprah protégé and financial expert Suze Orman believes that mortgage debt and college loan debts are “good debt” because they are investments that have financial payoffs. For Orman, a home is a financial asset, and is thus a no brainer as a “good debt.” As for college loans, Orman says that with the difference in average lifelong income potential for a high school graduate versus a college graduate being in the millions, investing in an education pays real dividends.

Regardless of the way financial gurus look at the concept of “good debt,” almost everyone who has ever put pen to paper on the subject of debt will agree that “bad debt” is really bad. Financial planers warn against putting vacations, tech gadgets, exorbitant meals in restaurants, and other fleeting purchases on a credit card because they add to debt, but do not have any financial pay off in the future.

While there is no magic get-out-of-debt card, careful financial planning, budgeting, and not spending outside of one’s means are all ways to manage the debt monster.

Author: Brendan Purves

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