Credit Card Debt Management

Are credit cards good debt or bad debt? It’s really all in the eye of the beholder… er, the cardholder. The Depression-era generation was probably onto something:

“My grandma used to say that if you’re going to buy something that doesn’t go up in value, and you can’t afford to pay cash, then you can’t afford it,” David Bach, CEO of Finish Rich, Inc. told MSN Money.

It’s true that emergencies arise, but it’s amazing how when you’re budgeting strictly and buying only what you can afford to pay for in cash, you have enough money for the emergencies. Somewhere along the way, the old-time mentality got lost. Now, debt is divided into “good debt” and “bad debt.” In today’s world, the FICO score rules with an iron fist and separates the haves from the have-nots. Even though FICO rules are about to become a tad less stringent, you still better eat your Wheaties and study up.

Good debt

No matter what the credit card companies would have you believe, “good debt” means wealth-building debt. And credit cards are generally not wealth-building. But gone are the days when you can save up to buy a house with cash. It’s just not going to happen in most cases, unless the property is a “handyman special” or in the ghetto. So home loans are great and, when done correctly and reasonably and with the proper downpayment, they are a wealth-building tool. A home loan is an example of debt incurred to buy something that will increase in value. It’s basically an investment. Bonus: home loans come with all kinds of tax breaks.

Student loans could also be considered good debt, because it’s an investment in an education that will help you earn a living (fine arts majors aside).

Bad debt

Car loans can help you pick up chicks, but they won’t help you pay for dinner. My now-husband was a perfect example of this when we met. Shiny red Ford Mustang convertible, but we sure did go Dutch on the dinner bill. OK, but I still married him so maybe car loans are a good investment?

Bottom line: It’s a known fact that automobile values drop like a rock as soon as you drive them, so don’t knock your debt-to-income ratio out of whack over a possession that will hold a mere fraction of its value within six months. Not to mention you’re going to have to pay for the vehicle’s gas, upkeep and maintenance.

And that’s where credit cards come in. Credit cards are undeniably handy when emergency situations arise and you don’t have the funds in place to deal. A credit card could also be used to finance investments like a college education (although that would just be stupid when there are student loans available at lower interest).

So all that to say credit cards are not necessarily “bad debt.” But they’re not necessarily “good debt,” either. It’s all in how you use them, and many people use them to purchase items that lose value very quickly. And really, even if you pay on time every month, credit card companies can still pull out a “gotcha” from the fine print terms and conditions. And they will. So there you have it, the good, the bad and the ugly of the wiley world of debt.