Ideally, we would all be debt free. No mortgage payment. No car payment. No student loans. No credit card companies charging us interest. If this describes you, then CONGRATULATIONS!
I encourage you to stay debt free. But I know this doesn’t describe the majority of us. In fact, the average US household has almost $120,000 of debt1
Here’s how this debt breaks down by major category:
Almost $85,000 or 71% of this debt is secured by our home. Is this “good” debt? Is there such a thing as “good debt?” Some would say “absolutely not.” Anytime someone else is charging you interest, you are paying a cost and they are being rewarded for it. This is true. But certainly not all debt is created equal. Instead of trying to define debt as “good” or “bad” (or ugly) let’s look at it a different way.
First, is what we are buying with that debt something that will bring value or lose value? Over the past 60+ years home values have on average gone up about 4% each year (though not always) and according to the US Bureau of Labor Statistics (2019), someone with a college degree makes on average $26,000 more annually than someone who never attended college (though not always). So perhaps we can consider mortgages and student loans as value gaining debt. Car loans and credit card balances are definitely not value gaining.
Second, what is the cost of the debt? This is most simply viewed by the interest rate you are being charged. The higher the rate the more costly that debt is. As of this date average interest rates were:
| Loan Type | Rate |
| Mortgage Loans | 3.1% |
| Car Loans | 4.6% |
| Student Loans | 5.0% |
| Credit Cards | 16.0% |
So, to try to chart this out using these two factors of value gaining or losing and low cost or high cost debt, we would get the following:
Debt you take on should fit into the GREEN quadrant. The debt in the RED or YELLOW quadrants either don’t add value and/or are very costly. Please note that even the GREEN debt should be taken on within reason. A topic I address here.
1 Federal Reserve Bank of New York Q2 2020 Consumer Debt Report and US Census Bureau statistics