Good Debt vs. Bad Debt: Is either a good idea?

July 21, 2010 - PRLog -- Andover, Massachusetts July 13th 2010 — After recently reading an article on Yahoo Finance about debt some key points stood out to me. For one, not even experts in personal finance always have the right answer. And two, most Americans definitely don’t know enough about personal finance to make the right decisions. The article went into great detail about the differences between good and bad debt. The factor that made a debt good was that it created wealth, such as student loans, home mortgages, etc. Bad debt was any debt owned by a consumer that loses value over time such as car loans and most other unsecured debts (credit card bills, personal loans). While there are good and bad types of debt, the distinction between the two can vary depending on who you ask.

The most shocking thing this article mentioned was taking out a HELOC (Home equity line of credit) to pay off your credit card bills. If you only look at the interest rates this would make sense, as a HELOC typically has interest rate below 10% while the average for credit cards is anywhere from 13%-18%. But, consumers need to look at more than just interest rates when considering whether to take on a new line of credit. A typical HELOC can be of various lengths with the typical being 15 and 30 years. So, when a consumer opens a HELOC for $15,000 to pay off an equal amount of credit card debt, they will be paying a lot more than just the initial $15,000. A $15,000 HELOC at an interest rate of 6.25% over 30 years would end up costing the consumer over $20,000 due to interest and finance charges. While this is a better scenario compared to using a credit card with a higher interest, it ignores another key factor. Consumer trends over the last decade indicate that even if they use a loan to pay off a credit card bill they generally do not change their spending habits. Without a change in spending habits the consumer will continue to create new credit card debt even while paying  monthly on the HELOC. The end result is a $15,000 HELOC that can last up to 30 years as well as a new credit card with a balance increasing each month. The key to becoming debt free is a change in spending habits. If you chose to get a HELOC to pay off your credit card bills, make sure that you also swear off new credit card debt. If you don’t, you will only be making your financial situation worse.

While this is an extreme example, much of the rest of the article is relatively accurate. In general, debt should be avoided at all costs as it always will cost you more than paying cash for anything. But, typically student loans and home mortgages are beneficial for the borrower. A better education can lead to a higher paying career in the future while home prices have increased by an average of 6.5% annually over the past 30 years. The exact opposite is true for most types of consumer debts. Car loans are for many Americans the largest debt they own besides their home. While a car is necessary for most, having a large car loan payment each month does not make sense. A vehicle loses value everyday you drive it, but the amount you owe only goes up as interest adds up over time. This is why I recommend taking the smallest loan possible out and purchasing a car with as much cash as possible.

The old belief that debt only affects your finances is no longer applicable in today’s post recession America. Your debt levels and payment history are direct factors along with your debt to income ratio and a few others that impact your credit score. While this score will definitely impact your financial decisions in the future it also impacts other aspects of your life. Many landlords and future employers use a credit report to determine the viability of the potential tenant or employee. Many insurance companies charge a premium for consumers with low credit scores while those with premier scores get a discount. As you can see, debt is a fact of life in America so make sure you know how it is impacting your life.

Preferred Financial Services is a debt reduction firm certified by the CFC (Center for Financial Certifications) and accredited by U.S.O.B.A. (United States Organizations for Bankruptcy Alternatives). Headquartered in Andover, Massachusetts, Preferred Financial Services has been a leader in the debt reduction industry since 2003. Preferred Financial Services has acquired some of the best experience in the industry over the past 7 years. In 2009 alone Preferred Financial Services reduced over $16.5 million worth of consumer debt for just $6.4 million, for a savings of about 60%- and over 2,900 accounts were settled on behalf of their clients.

For more information, please visit www.pfsdebtrelief.com or follow us on our blog at www.pfsdebtrelief.com/blog/ .

Contact:
Stephan Tavernini
Marketing Coordinator
Certified IAPDA Debt Arbitrator
Preferred Financial Services
stavernini@pfs1.net

Original Article:
http://finance.yahoo.com/banking-budgeting/article/109993...

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Preferred Financial Services is the leading voice in the debt settlement industry. PFS has worked with hundreds of creditors to help negotiate realistic goals for those drowning credit card debt.