With the new year well underway and the cost of living still biting, it’s prime time to look at personal finances and whether there is such a thing good debt or bad debt.
Financial services professionals usually class a debt as “good” if you are borrowing for investment purposes and where interest payments are tax-deductible, and “bad” if it is not tax-deductible.
However, this narrow definition would put your mortgage in the bad column, as this is how so many Australians work towards owning an asset. Realistically, whether a debt is good or bad depends on your financial circumstances and objectives.
Credit cards, especially if you don’t regularly pay them off, are considered bad debt.Credit: Fairfax
I’d see a loan to build a business, generally tax-deductible, as good debt provided the loan is used to grow the enterprise. Borrowing to keep your business solvent and pay salaries or debtors would be bad debt.
Your home loan could be a good debt if it meets your personal objective of buying a family home to secure your future and once you pay down the debt to a manageable level, you extract the equity to invest and accumulate further assets outside the family home.
Both these examples might become bad if they were not meeting your objectives or were at odds with your financial situation. The bottom line: any debt is bad if you can’t pay it back.
The big no-no is credit card debt. It can be a smart cashflow strategy to use your credit card only if you always pay off in full every month. It’s a terrible debt if you rack up spending, then can’t or don’t pay the full amount monthly and get hit with eye-watering interest rates of around 20 per cent.
Credit card debt waned significantly during COVID-19 because people couldn’t go out and spend, but it has surged back up to worrying levels. Interest rate hikes make people prioritise paying their mortgage, with many using credit cards or AfterPay to plug their cashflow gap.
Good, bad, or just okay? How to know when to take on debt
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12.03.2024
With the new year well underway and the cost of living still biting, it’s prime time to look at personal finances and whether there is such a thing good debt or bad debt.
Financial services professionals usually class a debt as “good” if you are borrowing for investment purposes and where interest payments are tax-deductible, and “bad” if it is not tax-deductible.
However, this narrow definition would put your mortgage in the bad column, as this is how so many Australians work........
© The Sydney Morning Herald
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