"Rob, when is it acceptable to go into debt?"

I opened up my Facebook page to some questions recently someone had asked when it is permissible to go into debt. This a question that many experts disagree on and some even call some debt “good debt”. I don’t think there is such a thing as good debt; I do think that there is debt that people can live with, but also debt that people cannot live with. What should be clear though is that a person’s goal should always be to get out of debt as soon as possible.

Let’s look at some different types of debt and talk about their level of permissibility.

Credit Cards

With an average APR of 15% and an average household balance of $15K, credit cards are damaging. That is why I recommend no one have a credit card balance that spans month-to-month. Your goal here is to never pay interest. I would try every solution before turning to credit cards: Local churches, friends, family, and selling things that you don’t need. Credit card debt can build quickly and spin out of control before you know it.

Student Loans

Student loans, I would say, are even more damaging than credit cards. With an average interest rate of 7.9%, students are graduating college with an average balance of $30,000. Moreover, the government is putting students on 25, 20, 15, and 10 year plans. Even at the smallest term, 10 years is too long to be strapped to a loan. This is also the debt-type where there are the most options to not go into it. Scholarships and grants go unclaimed every year and parents do not spend enough time with their kids trying to apply for scholarships and get that free money. School of choice is also important as well. Why pay twice as much for an out-of-state school? Doesn’t make much sense. 99% of the time an in-state school will have the same degree and the same merit.

Auto Loans

Auto loans in America are getting out of control. The average payment is $490/month and people are buying cars that cost as much as they make in one year. There are only a few rare situations when I will tell someone to go into car debt and they have to meet the following criteria:

  • On a budget and the payment fits into their budget
  • Able to pay off the loan in one year with Flex Cash balance
  • All other options have been exhausted

You can get a dependable car for $3,000 and then work hard to move up to a better car. There is no reason though someone living paycheck-to-paycheck should have a car loan that is $490/month on a $30,000 vehicle. If you do, sell it, cut your losses and start rebuilding.

Mortgages

Here’s a debt that I would advise someone to go into, but again, they need to meet some conditions. Homes are expensive and it can take someone a long time to save up $100,000 for a starter home. For that reason, I recommend reasonable mortgages and then quick payoffs. Here’s the criteria:

  • At least 10% down (though, 20% is preferable to avoid PMI)
  • Payment (with taxes and insurance) is less than 30% of net monthly income
  • Qualified for a low APR, <5%
  • Emergency fund is established

I’ve written an article on home-buying so give that a look before you jump into a mortgage. And remember, owning a home isn’t right for everyone, especially if you plan on moving around a lot.

In Summary

There really is no “good” debt, but mortgages are a reasonable debt that people can incur as long as it is done properly. Credit cards, auto loans, and student loans should be avoided at all costs. I have been in all four of these debts before and I can tell you, it is not a good feeling. That is why I have written the 9 Moves plan to help people get out debt, in an organized way, while building wealth. People are free to disagree that there is actually “good debt” but let me ask you: Would you be able to invest more and do more things if you didn’t have those payments weighing you down?