Is there a difference between good debt and bad debt? Let me try to provide some clarity on this controversial and confusing question.

To begin with, let’s clear up the difference between credit and debt.  Credit is the ability to borrow money; debt is actually borrowing the money.  Because credit is so freely available in our society, it is easy to think we can “afford” things that we don’t have the cash to pay for now.  Most Americans delay the actual outflow of cash for consumer goods until at least the next month when they pay their credit card off.  We often know more about how much credit remains on our card than we do about how much cash remains in our bank at a given time. 

To tackle the credit mindset, it is wise to adhere to a spending plan that takes into account what you really have to live on in a month.  If you can consistently spend within your income, and not beyond it, you will have more discipline as you resist the allure of ballooning credit card debt.

Another thing that I often teach regarding debt is that there are four rules that you can follow when you make borrowing decisions and determine if the debt you are about to incur is good debt or bad debt. They are:

​1) Common Sense:  The economic return must be greater than the economic cost.  A home usually falls into this category assuming you have put down a solid down payment.  Almost never would consumer debt make common sense.  “Renting” money and having to pay much more for the privilege of using it than if you had paid cash rarely, rarely makes common or economic sense.

2) A Guaranteed Way to Repay:  The idea here is that if you have debt that can be repaid by selling the item (such as a house) or by selling or liquidating some other asset (such as a savings account or CD), then you are in the “safe debt” zone. In these situations, you have a “guaranteed” way to repay the money borrowed. You may have to sell something, but you can repay it.

3) Peace of Heart and Mind:  This criterion involves having a conversation with yourself.  Do you know why you are making this debt decision?  Do you feel the decision is in violation of anything moral or spiritual?  Do you have a settled heart about the decision?  Only you can answer these questions.

4) Unity:  This criterion involves having a conversation (with your spouse or accountability partner if you are single).  God designed us to live in relationship, and He gives others the wisdom and perspective that we lack.  When we are married, we bring honor to our spouse and to God by acting in unity with them.

So, as you seek to manage your debt wisely, consider altering your paradigm from “how much credit do I have?” to “how much cash do I have?” Then, employ the criteria above when you face new debt decisions.

May God’s peace encourage you as you pursue financial wisdom and depend on His Truth.