Good Debt -- Bad Debt
What's the Difference?

We've all heard it before -- avoid debt at all costs.  There are times, however, when major expenses such as home, vehicle, or education require taking on debt.  Borrowing for items that are important and/or increase net worth, or for bills that can be quickly repaid, is "good debt."

"Bad debt" on the other hand is borrowing for things that fail to build wealth and/or lose value over time.  Examples include restaurant meals, clothing, and home electronics.  Bad debts often cost hundreds, even thousands of dollars in interest payments.

According to Eric Tyson, author of Personal Finance for Dummies, "the financially healthy amount of bad debt is zero."  In other words, don't borrow money for low priority items.  To keep "bad debt" in check, consider these guidelines:

Small Purchases (Under $500):

• Use cash, checks or debit cards.  Checks and debit cards deduct purchases from bank accounts so you can't spend money you don't have.

• Use credit cards only when you know you can pay the bill in full and there's a grace period for new purchases.

Medium Purchases ($500 
to $2000):

• Reduce spending to accumulate cash.
  

• If you have an emergency fund, tap it to cover the bill.
  

• Use a low-rate (6% to 12%) credit card.  Check out www.credit-trak.com for names of low-rate lenders.

Large Purchases ($2,000 to $10,000)

• For large expenses, consider a home equity loan or line of credit.  Interest is generally lower than other types of credit and may be tax-deductable on loans up to $100,000.  Be sure to pay off the loan as quickly as possible and borrow only the amount you absolutely need.  Avoid taking on any new debt while you pay off this loan.