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I Love Good Debt

A recent article in The Wall Street Journal outlined how the richest of the rich in the U.S. are actually taking on more debt than the middle or lower classes of the country. Between 1998 and 2004, the richest 1% of households bulked up on $342 billion of new debt and now represents 7% of total U.S. household debt.

Are the rich feeling the pinch? Hardly. The key to these statistics is the fact that the rich borrow differently from much of the rest of the country. Specifically, they avoid credit card and other high-interest loans for discretionary purchases in lieu of lower-interest debt used to buy assets -- debt that we Fools like to call "good debt."

The Good
Student loans are a great example of good debt. Interest rates on student loans are typically very low (the one I'm still paying off is at 4%). In exchange for taking on the debt, you take home a degree that will likely increase your earning power in the job market.

The ubiquitous mortgage loan is another example of what can be good debt. Taking on a mortgage loan is a great way to leverage a bank's money to purchase an appreciable asset, whether it's your primary residence or a rental home that will also put cash in your pocket.

The Bad
For those who capitalize the "f" in Fool, you're probably already very familiar with what constitutes bad debt. Since the interest rate on credit cards can be 15% or higher, holding pretty much any balance on your credit card gets a big thumbs down for bad debt.

Though Best Buy's (NYSE: BBY  ) no-interest-for-one-year teaser rate on that new plasma TV is all well and good, the interest rate that kicks in after that first year is -- you got it -- bad. The interest rates that auto loans typically sport put them on the bad side of the ledger, too. Sure, it would be great to have that brand-new Lexus SUV, but your bank account will love you if you opt for the used Honda that you can afford instead.

The Green
Debt can often have such a bad ring to it, and it's easy to think that all debt is bad debt. As the rich are showing us, though, debt used wisely can be an ally in our quest to financial freedom. So this Valentine's Day, I'm professing my love for good debt.

If you want to learn more about how to love good debt or how to squash your bad debt, check out The Motley Fool's Green Light newsletter. It's packed with great tips on how to build your bankroll. No need to thank me now -- just take me out to dinner when you've made it into that top 1%!

More foolish financial fun:

Best Buy is a Motley Fool Stock Advisor pick.

After writing this article, Fool contributor Matt Koppenheffer is now at one with his debt. He does not own shares of any of the companies mentioned. The Fool's disclosure policy is always debt-free.


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Matt Koppenheffer
TMFKopp

Matt is the Managing Director of The Motley Fool GmbH, The Fool's German business. Besuch uns bei Fool.de!

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