Many consumers have a deep desire to become debt free. The question is: What exactly does debt free mean? Does living debt free mean you will never use credit again? Does it require paying cash for everything and cutting up all your credit cards? Does living debt free include large investments like a home and the accompanying mortgage or only eliminating credit card debt?

Everyone has different goals regarding debt elimination strategies because we all have different life experiences that color the way we see borrowing. There is no one size fits all when it comes to defining what it means to live a debt free life. Some of the differences in attitudes stem from recategorizing debt as good or bad debt, in an effort to redefine the typical negative view of borrowing. Let’s take a closer look.

What is Good and Bad Debt?

Traditionally, good debt refers to the money borrowed for good and services, which increase in value over time. This type of borrowing is more of an investment than an expense and might include a home mortgage, student loans, real estate investments, or borrowing money to start or grow a business. Each form of debt has an element of risk and a way to increase in value, building your net worth using debt to leverage growth.

Bad debt is considered any debt used to buy goods and services that decline in value. Bad debt might include credit card debt, car loans, or financing a boat or other recreational vehicle. It includes personal loans, title loans, and payday loans.

All debt reduces disposable income and spends today's dollars on yesterday’s purchases. In and of itself, this is not the issue. The problem with so-called bad debt is that the item loses value while you are still making payments. For example, if you spend $10,000 on a credit card to buy everyday good like clothes to electronics and you take ten years to pay it off with minimum monthly payments, the items purchased have been used up, sold or thrown away long before the debt is settled.

The Challenge

It is true that not all debt is equal. The challenge is that the categories only provide a guideline riddled with exceptions. For example, if transportation in the form of a vehicle is required to get to work, should you take the $2000 you have saved and buy an old clunker or are you better off using it for a down payment to finance a car that can provide reliable transportation for the next decade? It’s a trade-off of a monthly car payment or ongoing car repairs.

On the other hand, let’s say you have $20,000 in an investment account earning around 8%, and you want to purchase a $20,000 car. Should you take the money out of the investment when financing is available with no down payment?

Zero percent offers on a credit card can provide a way to use operating income (your monthly paycheck) instead of a capital expenditure (your savings) for items you need and want.

Debt management can provide an increase in wealth, even in forms of debt that may fall into the “bad debt” category, when used correctly.

On the other side of the coin, not all good debt provides great returns. Houses are foreclosed, businesses fail, and college students graduate with $30,000 or more in debt, unable to find jobs earning enough to pay the debt off.

These are each a form of good debt that is in theory supposed to provide positive returns. It would be like saying because the stock market trends upwards, every stock is a good buy.

Personal financial failures skew your view of debt. However, just because a percentage of consumers have bad experiences, does not mean all bad debt should be avoided and all good debt should be embraced.

How Do You Decide What Debt You Should Carry?

Long Term Goals. Compare the value of the item you want to finance with your long term goals. Even if the interest rate is right and the value is there, if the purchase takes you further from your long term goals, reconsider.

Evaluate the risk. All debt agreements make the assumption that your finances will remain the same or improve. The risk is that something your financial situation declines unexpectedly. If your finances always improved even credit card debt to buy that big screen television or new iPhone would be manageable. Income and expenses, however, are more dynamic rather than static and can change quickly. Access to savings, a cushion in your budget, and identifying ways to reduce expenses are effective ways to reduce your risk of becoming overextended.

Debt can be leveraged to build wealth, and it can also be a noose around your neck that strangles your cash flow. When choosing to take on debt, make it a conscious choice, not a habit. If you choose to use a credit card for everyday expenses, track it with an app, and pay it off each month. If this is too difficult, stick with a debit card. Better to forgo impulse purchases and save yourself from years of heartache as you struggle under the weight of too much debt.


Personal spending habits. If you have $20 in your pocket and feel the need to spend it, you should not carry around credit cards. That is like having thousands of dollars burning a hole in your pocket. The ability to resist impulse spending should play a factor in whether you choose to carry a credit card with you at all times. If you tend to jump on ‘the sale’ because it’s a bargain, rather than because you need the item, leave the credit card at home.

What is the debt buying? Evaluate your borrowing habits and the value of what you are purchasing. Buying a new refrigerator with zero percent financing and paying it off in six months may have a lot of value. The fridge will save energy, may help you sell your home for more, or have other benefits of getting the item today, rather than waiting.

Interest Rate. Just like you search for value in the price of an item, also search for the value of the debt you are considering. Can you pay the zero percent offer in full by the end of the promotion? Do you truly need the item? Is the offer the best that is available or should you shop around for the best financing?

What are other uses for the money? Taking on monthly payments increases monthly expenses decreasing discretionary spending. Will the debt result in lower contributions for retirement, eating out less, or fewer times on the golf course? You have 100% of income allocated now. When you add any debt, you displace that income, which must subtract from the budget elsewhere.

If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis.  Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs.  You don’t have to struggle with high interest credit card debt any longer.  Call (855) 250-8329 or get in touch with us by sending a message through our website here contact-us