Who created the myth of "good debt?"

[Skidmore]

I first remember hearing about this critter sometime around Nineties, I guess. Where did it come from? What is it? In my experience, all debt is debt and should be paid off. What is good about it? Now if you are talking about R&D, then I don't consider that something that should be under debt, good or bad. Rather, R&D should come from profits as part of the cost of doing business and shareholders and other stakeholders should forego profit-taking until that is accomplished.

[Recursion]

1. It's generally good to finance capital expenditures with debt

That's what I think of as "good" debt. Debt that was used to buy something whose value will itself amortize over a period of time (hopefully a period at least somewhat similar to the finance period). Bad debt is debt that you use for operating costs.

[AllentownJake]

5. Depends

You have to way your interest rate with your return on investment.

If you borrow to buy a piece of real estate at 4% and get a 6% return after operating cost good.

If you borrow at 6% and get a 4% return bad.

[Recursion]

8. No, I think you missed my point

In that sense you get 0 return on it because it's a capital investment: this isn't inventory; you're not going to resell it. The interest (that is, the cost of the debt itself) just becomes part of the cost of the cost of the building or whatever.

[AllentownJake]

12. You get a return on a capital investment

That is silly to say you don't.

If you are buying a piece of real estate or leasing it you are doing so to house some sort of operation to support the business or profit.

[Recursion]

18. Not from an accounting standpoint you don't

That's what distinguishes it from operations and inventory costs, and that's precisely why it's accounted on a separate ledger. Remember, accounting exists in a parallel universe.

[AllentownJake]

29. I'm an auditor of 7 years

an ROI is done on every project whether it is from an income statement accounting perspective or from an operating perspective.

Depreciation and tax credits are considered in capital acquisitions as well.

[AllentownJake]

2. Probably the same asshole who sold equity appreciation

and to avoid stocks that pay dividends.

It was a scam. Pile up as much debt on a company and cash out in the E-suite before it comes crashing down.

The mafia used to do this, actually most of our finance sector is developed from Mafia style scams.

[LARED]

3. Good debt is the type

debt that allows you to buy a home, buy a car, puts someone through college. The amount of good debt is related to your ability to pay it off.

[Statistical]

4. That is silly.

Say you have a company that is making $100M a year but building a new factory will cost $1B. The company should wait a decade. Of course a decade later now means the factor will cost $1.3B. Also in the meantime your competitor has built that higher efficiency factory and is now undercutting you. This means you need to lower price of your product and profit margins decline to $30M a year. So in ANOTHER decade you will have saved the $1.3B.


With so much cash and so little productivity long before you ever build the factory a competitor does a hostile takeover seizes your assets & cash and uses it to expand their operations.

On a similar note I am sure you saved cash for 35 years to buy a house right? Of course after saving cash for 35 years you now find housing prices have tripled. Likewise if you kid doesn't have the cash to go to college he should simply save cash and die before going to college but his kid "might" go to college. Right?

[AllentownJake]

6. The ROI has to be higher than the interest rate

If it isn't, it was a foolish venture.

Theoretically with the record low interest rates, there should be tons of investing going on...however businesses are evaluating future growth prospects and are saying no thanks.

Classic deflationary debt crisis scenario, which is why we need to get banks lending again was bad medicine.

[Statistical]

9. Of course but that is a far cry from saying no debt is good.

Also with a loan/debt inflation works on your side. Say you finance the factor at 8% but their is 3% inflation. You effective interest cost is 5%. Now as a business you can right off that interest (35% tax bracket) thus your effective post tax interest rate is like 3.25%.

Assuming gaining the new factor in a year as opposed to 2 decades has a higher ROI than 3.25% it would be foolish not to use debt to finance capital expansion.

[AllentownJake]

10. If you view the business environment friendly

However, if you view an unfriendly environment it is foolish to borrow at any rate other than 0.

[Statistical]

11. Another foolish sweeping generality.

Even in an unfriendly environment borrowing (especially at a low rate) might be necessary to avoid the slow death of margin erosion and business contraction.

[AllentownJake]

15. We'll see

Cash is king right now. Wondering what our equivalent of the Creditanstalt is going to be this time to kick off wave two.

EU is doing all they can to save the French banking system right now.

[rug]

7. Alexander Hamilton

"A national debt, if it is not excessive, will be to us a national blessing."

[izquierdista]

13. The people who own it

How else are they going to sit on their fat asses and keep the income streaming in?

[Mist]

14. Well, to the people who loaned the money, debt is good, as they're making interest on it. nt

[TexasObserver]

16. It only works if the asset appreciates at a rate greater than debt service.

It can and does happen, but such things are the exception, not the rule.

Good debt would be a house with a mortgage at 4%, where the house is demonstrably appreciating an average of 6% per year. Paying off such a mortgage early really doesn't make much sense. Better to pay off all revolving debt.

[Coyote_Bandit]

17. Probably some frickin finance professor

Leverage increases return on investment ya know.

And individual citizens who had their homes and cars paid for were told to carry balances on their credit cards in order to have a current credit history in case they needed to finance something. Or get a job.

[Statistical]

19. Keeping a balance has nothing to do with credit history.

Put daily finances on credit card, pay it off at end of month.

I have 5 years of current activity on my credit report. Never paid a penny in interest*.



* Well technically that isn't correct. USAA allows me to use my credit card as overdraft protection. Overdrafted a check and it cost me about $0.32 in finance charges (avoiding $25-$50 overdraft fee). Then again USAA is member owned so they care about account holders.

[Coyote_Bandit]

22. Ummmm......

You don't have a balance. Good for you. But I'm guessing you have some other on-going obligation. A rent or mortgage or car payment perhaps.

I'm talking about folks who don't have those kinds of obligations. Folks who own their homes and cars outright. Paid cash for them.

Paying the balance off every month does not demonstrate the ability to make a recurring payment on an on-going oboligation over a period of time. You show that ability in other ways. These folks use their credit cards. They carry a small balance, regularly add new charges and make monthly payments of a regular set amount.

These folks have been told that they need to do this - just like corporations have been told that leverage is good and should increase return on investment.

[Statistical]

23. That is the point. That is 100% not correct..

Just because people parrot the same wrong talking points doesn't make it true.

"Paying the balance off every month does not demonstrate the ability to make a recurring payment on an on-going oboligation over a period of time"
Incorrect. 100% absolutely incorrect. Running up a balance doesn't show that either.
Carrying a balance DOES NOT improve credit score. Actually it lowers your credit score.

Credit score has multiple components but usage (payment history) and utilization is another.
Paying balance in full and revolving a balance both generate positive payment history (on times payments month after month for years).
So in that respect they are equal (both + to credit score). However the second component is utilization. This is total revolving debt carried / total credit lines.

Example:
$1000 balances on $20,000 credit lines = 5% utilization.
$100 balances on $5,000 credit lines = 2% utilization.

So why is low utilization (or 0% utilization) rewarded. In the credit model it indicates that people with low utilization tend to use credit sparingly and live within their means. Someone who carries high balance for extended periods of time without any reduction in carried debt is essentially living beyond their means. Now this might not be their "fault" (job loss, injury, large unexpected expense) however the model doesn't care about "fair" it only cares about risk. People living beyond their means (fair or not) are higher credit risk.


Revolving a balance indicate a credit risk and LOWER your credit score by raising utilization.
The more you revolve the more it lowers it.

Small amount of revolving debt is a negligible hit but anything above 5% total starts racking up some serious downward pressure on credit score.

There is absolutely no reason to revolve credit card debt other than you don't have the ability (or desire in terms of low interest debt) to pay it off. There is absolutely no benefit to credit score in revolving credit card debt.

[Coyote_Bandit]

24. Ummmm......

Take a deep breath.

[ejpoeta]

20. i assume good debt is anything considered an investment... like a house

or your education. but then, is that like when you give your kid and 'emergency' credit card and pizza becomes an emergency or that new ipod they wanted at the store?? good debt can only be good if you can afford it. plus, you have to have a decent credit score and you can't get that without a revolving account. so a credit card. what a racket!! so we have gotten a couple credit cards which sit in the safe and are used sparingly. like when the water pump broke. bob took the lowe's card and bought the parts to fix it. if

it's a sound investment then it is ok. as far as businesses go, there is a place for borrowing money.

[cbdo2007]

21. I consider my mortgate "good debt"

[Skidmore]

28. I consider my mortgage as

paying rent to the bank or finance company holding it, only with none of the possible perks in a lease.

[immune]

25. creditors

and they make you like being indebted to them. Those crumbs are so tasty.

[Forkboy]

26. It's inherently built into our monetary system by the Federal Reserve.

"Good debt" is just a friendly way of putting it now.

[Swede]

27. Well it's the opposite of bad debt- revolving intererest (credit cards).

Good debt has simple interest.