Answering Debt Questions with More Questions


One question that continually comes up in regards to debt is, “Is this Good Debt, or Bad Debt?” The answer to that question is always different and entirely depends on the scenario. There are several schools of thought, with a more popular one being, “Is the interest I’m paying MORE than the interest I could be earning?”

This falls along the same lines as another money talking point: “Should I save/invest this cash, or use it to pay down this debt?” It is reasonable to expect a greater than 5% return (on average) by investing that pile of cash — but completely unreasonable if shoving it into savings account. Sometimes debt can be your friend (tax advantages, a low mortgage rate) and sometimes it can drag you down (student loans, credit cards, payday loans).

But the answers aren’t always cut and dry. For example, if you have 2.5% mortgage with a $50,000 balance, most would consider that amount, at that rate, a huge asset and advise you not to pay it off immediately. However, if that $50,000 of debt is causing you to lose sleep at night, your emotional health is worth taking into consideration.

All things considered, debt is not black and white. And while your FICO* score is not something that should be worshipped, it is beneficial to leverage your debt as an investment. The website debt.org (https://www.debt.org/advice/good-vs-bad/) is a good baseline resource for information about debt. But don’t always take broad-stroke advice as gospel, and remember to think critically about where to put money, and who to take it from.
 
 
*Similar to the way Federal Express eventually became FedEx, the company that develops FICO scores used to be called Fair Isaac Co. It was often shortened to FICO and a few years ago that became the official name. To create credit scores, they use information provided by one of the three major credit reporting agencies – Equifax, Experian or TransUnion.