The term “debt” took on a grim connotation for several years following The Great Recession which erased trillions in paper wealth and pushed jobless ranks to decade highs.
In some circles, the new version of the American Dream was eliminating debt and preventing it from building up again. After all people were saving more and consumers used credit cards with greater diligence. Just before the financial crisis, household debt had been at more than $11.5 trillion and by mid-2013, it was downsized to under $10 trillion.
However, much of that was misguided. Debt is good – for both personal finance and U.S. economic growth. Moreover, there is really no such entity as “bad debt.” Esteemed financial expert, Paul Krugman, went on record in The New York Times declaring that what nations need are larger deficits. So, economists have been cheering that household debt has been back on the upswing for the past two years. After all, consumer spending accounts for 70 percent of the U.S. economy.
Debt is platform for you to build wealth
From ancient times, the ambitious have arranged for credit to finance their ventures. The money lender is the oldest profession. Things haven’t changed.
Currently, the majority of America’s 28 million small businesses use credit cards as a standard tool to keep operating. So do startups for getting off the ground. The media feature startups which receive millions in venture capital. But the more mundane story is that most new entrepreneurs use their own credit cards as a fast, easy source of seed funding. And the National Bureau of Economic Research found that the younger the company the more jobs it creates.
Students leverage loans to finance degrees and certifications. Those, if the student had been smart about the marketability of the program, increase earning power. According to the U.S. Labor Department a college graduate can earn during a career about a $1 million more than the high school graduate.
A third possible road to wealth through debt is investing. That might sound reckless. However, some kinds of investments are less volatile than others. Stories on MyBankTracker have been bullish on rental property, that is, if the investor does the due diligence. Location is a major variable in profitability. According to IBIS World, it’s a 165 billion market with 4.9 percent growth.
There are no absolutes associated with “good debt”
Those three examples contain the potential to build value. And creating value is a standard definition of so-called “good debt.” Some debt strategies will pan out. Others won’t.
The reality about debt is that there are no absolutes about what “good debt” consists of. Yes, debt itself is good. But not all the entities designated as reasons to take on debt represent in themselves supposed “good debt.”
The classic example is the mortgage for live-in single-family houses and condos. Many financial experts, with a tone of great authority, label that “good debt.” But is it? That depends. The variables are almost infinite. There are the usual ones such as location. For Baby Boomers, renting might be the economically sounder decision. Buying brings on the uncertainties ranging from rising property taxes to unplanned repairs. Meanwhile, more Baby Boomers are entering retirement.That means having to make it on a fixed income.
There is no “bad debt”
Just as there are no sure things for “good debt,” there are no absolute categories for “bad debt.” Yet, now that debt has lost some of its stigma, the media have been publishing article after article hammering what will constitute bad debt. The usual suspects are loans for new cars, credit card balances not paid off monthly, and frivolous purchases. The tone, as in this piece of financial advice for consumers, is authoritative.
Let’s look at that loan for a new car. What should be obvious is that it could be an efficient way of creating value. The lawyer who buys it requires totally reliable transportation. No judge is going to give a pass on tardiness because of car trouble. Also, she puts in 80-hour weeks, leaving no time to attend to the kinds of repairs which go with used cars. Sure, the car depreciates as soon as it leaves the lot but she is shrewd enough to receive a great trade-in value when she exchanges it for another new car in two years.
As for credit card balances, those could provide interest-free funds for whatever. Those experienced with credit cards can go for years playing the zero-interest transfer game. For a small fee, the balance can be put on another card for a year or more. When that special offer is over, then another transfer is made.
The funds can be put to work earning money. An example would be a high-yield CD. Or it could be put in an IRA to reduce taxes. For about four years, I had been transferring the same $20,000. It covered the expenses of relocating my business across the country and purchasing new equipment. During one especially good year for my enterprise, I finally paid off the balance.
The typical purchase framed as frivolous – that is, bad debt – is a vacation paid for with a credit card or loan. Yet, that might provide the time-out to re-think business strategies, avoid doing something self-destructive like quitting a job in anger, or save a marriage. Divorces are expensive.
Inflation is your friend
Inflation is the best buddy for those in debt. That’s because the amount of the debt declines in real terms. The Financial Forecast Center projects that inflation is returning to the typical rate of increase: one percent to two percent per year.
In addition, some of those so-called “bad debt” decisions make even make more sense. The new car which has a seven-year loan could represent a less-expensive purchase than buying any car, new or used, as inflation gallops along.
Those balances which keep getting transferred will not bite you as they would have several years ago.
All debt may have negative impact on credit score
One consequence of debt is that it could lower your credit score. That could mean higher interest rates when you apply for a mortgage or other kind of loan. In addition, some employers review credit history as part of the hiring process.
The way to limit the damage is to pay all bills on time. Much of the score is affected by late payments.
Debt is your own business
Yes, there is a shifting in the mindset about debt. Those who read the business media have become aware that debt-free may not be a noble state of being. However, it may still require courage to approach debt as a strategic tool for building wealth. What to remember is: Debt is your business, not anyone else’s.
Jane Genova is a widely recognized authority on personal finance and the law.