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vancejohnson82
03-04-2009, 08:11 AM
Just a question out there....nobody has to be too specific or personally revealing here but I just wanted to see what the consensus was.

What is a bad debt to income ratio?

For example, if you are making 40K and you have 8K in debt, does that mean you are in trouble? How about 100K and 20k in debt??

Smiling Assassin27
03-04-2009, 08:20 AM
Think in terms of monthly income and monthly obligations. For example, at 40k per year, that's $3333 per month that you gross. The second variable is what your monthly payment is for your 8K in debt. The TYPE of debt will determine this. If it's a revolving/credit card, the payment on 8k will likely be around 160-240 per month, which means your DTI would be about 7% (divide 240 into 3333), which is pretty small. If it's an installment loan, say a car loan, in which your montly payment is $550, then you divide 550 into 3333 to get your DTI.

Keep in mind that DTI is usually calculated off your gross income, not your net. Net income is what you bring home, usually a lot less than your gross income (before taxes, deductions, etc.), so factor that in to know if your debt is too high a percentage of your net income, as that is a more accurate picture.

For lending purposes, I've seen DTI's at or above 60%, which is nuts but also relative. If you make 120K, 60% of that is 72k, meaning you would have 48K left over after paying your debt--still a lot of money.

frerottenextelway
03-04-2009, 08:24 AM
Just a question out there....nobody has to be too specific or personally revealing here but I just wanted to see what the consensus was.

What is a bad debt to income ratio?

For example, if you are making 40K and you have 8K in debt, does that mean you are in trouble? How about 100K and 20k in debt??

When your debt plus expenses are greater than your income.

Ie., if you pay $1,500 a month on debt (home, car, whatever) and your expenses are another $1,500 (food, gas, etc) then you're in over your head if you don't have steady and reliable income of more than $3,000 a month.

Of course, there are exceptions like college students where you're going to have accumulate debt with little income.

vancejohnson82
03-04-2009, 08:28 AM
Think in terms of monthly income and monthly obligations. For example, at 40k per year, that's $3333 per month that you gross. The second variable is what your monthly payment is for your 8K in debt. The TYPE of debt will determine this. If it's a revolving/credit card, the payment on 8k will likely be around 160-240 per month, which means your DTI would be about 7% (divide 240 into 3333), which is pretty small. If it's an installment loan, say a car loan, in which your montly payment is $550, then you divide 550 into 3333 to get your DTI.

Keep in mind that DTI is usually calculated off your gross income, not your net. Net income is what you bring home, usually a lot less than your gross income (before taxes, deductions, etc.), so factor that in to know if your debt is too high a percentage of your net income, as that is a more accurate picture.

For lending purposes, I've seen DTI's at or above 60%, which is nuts but also relative. If you make 120K, 60% of that is 72k, meaning you would have 48K left over after paying your debt--still a lot of money.

Thanks a lot.

The reason I ask is because a lot of people in my generation (sorry if I'm speaking for others) have used credit cards and student loans, being told that if you keep under so and so amount you will be fine.

However, a lot of us have 15-35K in debt before even being hired. I have a friend in law school who hasnt worked a day in his life and will graduate with over 120K in debt before he even steps foot into an office.

Now...with the economy the way it is and wage freezes happening all over the place, we are finding it hard to buy houses (i know two people my age that own a house), get married (I know 1 person that is married) or invest in the market.

I really believe that the market will continue to struggle because people my age have NO MONEY to throw in there because we have been taken advantage of in the past.

Plus, i wanted to know personally how I stack up and whether Im in any sort of trouble or not

vancejohnson82
03-04-2009, 08:31 AM
Also, what is the deal with these debt consolidation companies???

The commercials scream RIP-OFF but why would they exist if they are so

Dr. Broncenstein
03-04-2009, 08:33 AM
Bad debt = money I owe.

Good debt = money owed to me.

You're welcome.

Smiling Assassin27
03-04-2009, 08:44 AM
Also, what is the deal with these debt consolidation companies???

The commercials scream RIP-OFF but why would they exist if they are so

Basically, they're doing what you could do for yourself, really. YOu could easily come up with a debt reduction plan every bit as good or better as the one they would come up with. Even the non-profit companies will charge you a portion of your total monthly payment to your creditors, so why not do it yourself for free?

Hotrod
03-04-2009, 09:01 AM
Bad Debt = dead cap space

TailgateNut
03-04-2009, 09:02 AM
Also, what is the deal with these debt consolidation companies???

The commercials scream RIP-OFF but why would they exist if they are so

Why do "payday loan" services exist? Legalized Mob.

SoDak Bronco
03-04-2009, 09:03 AM
my student loans have been consolidated since 05 (when I graduated) and after making consecutive payments my interest rate dropped down to 2% which is really good. I consider that good debt bc of the low interest I am paying.

55CrushEm
03-04-2009, 09:04 AM
In the accounting world, bad debt is an amount that the company deems to be uncollectible. A company will put up a reserve against their receivable, b/c they don't believe their debtor will be able to pay it.

But I'm sure this isn't the answer you were looking for.....:approve:

SouthStndJunkie
03-04-2009, 09:06 AM
I think it is funny that vancejohnson82 is asking about bad debt....the real Vance Johnson was the bad debt king.

vancejohnson82
03-04-2009, 09:07 AM
I think it is funny that vancejohnson82 is asking about bad debt....the real Vance Johnson was the bad debt king.

he was also the orgy king.....

Tombstone RJ
03-04-2009, 09:11 AM
In the accounting world, bad debt is an amount that the company deems to be uncollectible. A company will put up a reserve against their receivable, b/c they don't believe their debtor will be able to pay it.

But I'm sure this isn't the answer you were looking for.....:approve:

Actually, this is correct. Bad debt is uncollectible debt.

LonghornBronco
03-04-2009, 09:11 AM
Credit Cards are BAD DEBT!

Loans on depreciable assets (cars) are bad debt.

Student loans, home loans, or loans on appreciable assets are reasonable debt.

If you want a conservative approach on debt, look up Dave Ramsey. He's good for getting your financial house in order. We used his baby steps approach in getting rid of our "bad debt"

SouthStndJunkie
03-04-2009, 09:11 AM
he was also the orgy king.....

I can appreciate that.

Garcia Bronco
03-04-2009, 09:14 AM
Please people get out of debt if you are. It's killing us.

Beantown Bronco
03-04-2009, 09:16 AM
Paging Travis Henry.....

Florida_Bronco
03-04-2009, 09:16 AM
Credit Cards are BAD DEBT!

Loans on depreciable assets (cars) are bad debt.

Incorrect.

If you want a conservative approach on debt, look up Dave Ramsey. He's good for getting your financial house in order. We used his baby steps approach in getting rid of our "bad debt"

You don't really listen to that moron, do you?

Fedaykin
03-04-2009, 09:17 AM
Also, what is the deal with these debt consolidation companies???

The commercials scream RIP-OFF but why would they exist if they are so

Basically, they advise (and sometimes charge) you to do one of the following:

* Consolidate all of your debt into one loan (e.g. go to your bank and get a second mortgage or other loan to consolidate all your other payments like credit cards, etc.). Generally this will get you an overall reduced "debt" because you can move debt from relatively high interest loans (credit cards) to relatively low interest loans. I'm guessing some or most of these organizations make their money by providing you with the loan necessary to do this.

* Otherwise move your debt around (e.g. if you can't do the above, find the lowest rate credit card you can and transfer all balances to it).

* Occasionally, in real crappy situations (e.g. you simply can't do any of the above) they will try to negotiate with your creditors for better deals. Sometimes the creditors will because they know that getting less out of you is better than getting none out of you.

They aren't doing anything particularly special for you, but a lot of people simply aren't savvy enough to figure the above out on their own.

Florida_Bronco
03-04-2009, 09:17 AM
Please people get out of debt if you are. It's killing us.

How is it killing us, and who is us? ???

Beantown Bronco
03-04-2009, 09:24 AM
Please people get out of debt if you are. It's killing us.

Individual debt isn't killing us. People who default on that debt are.....but debt itself isn't necessarily a killer.

snowspot66
03-04-2009, 09:38 AM
Student loan debt isn't a bad debt. It's just an uncomfortable one. It's pretty much a given that students these days will leave with a fair amount of debt. 50-150k in student loans depending on the field is pretty common. Just means you have to be smarter about your money when you get out there.

Fortunately it's not like they can reposes your education.

Beantown Bronco
03-04-2009, 09:41 AM
Alimony

LonghornBronco
03-04-2009, 09:46 AM
Incorrect.



You don't really listen to that moron, do you?

Hey FB,
What part do you dissagree with?

I agree that he is a little too conservative for my taste however he does have a affective approach, too which we had a lot of success. I just take the rest of that crap with a grain of salt. Also his approach is a little too simplified but with some of the morons racking up debt it's better to error on the side of conservative. Alot of our mess is because of greed AND people getting in over their head.

LonghornBronco
03-04-2009, 09:49 AM
How is it killing us, and who is us? ???

Let me guess, you're somehow profiting from people going further into debt. notsofast

Majik
03-04-2009, 09:52 AM
Please people get out of debt if you are. It's killing us.

Not necessarily, it's right up your presidents ally (I say your because he's not mine, I didn't vote for the fool). He's striving to get as many people possible dependent on the government.

Rohirrim
03-04-2009, 09:58 AM
Bad debt = money I owe.

Good debt = money owed to me.

You're welcome.

Beat me to it. :thumbsup:

Florida_Bronco
03-04-2009, 09:59 AM
Hey FB,
What part do you dissagree with?

The part about credit card and auto loans being bad debt. It's simply not true.

I agree that he is a little too conservative for my taste however he does have a affective approach, too which we had a lot of success. I just take the rest of that crap with a grain of salt. Also his approach is a little too simplified but with some of the morons racking up debt it's better to error on the side of conservative. Alot of our mess is because of greed AND people getting in over their head.

His approach isn't much more than common sense when it comes to paying down debt. His "no credit" way of life that he propagates is a very bad idea though.

Florida_Bronco
03-04-2009, 10:00 AM
Let me guess, you're somehow profiting from people going further into debt. notsofast

How do you figure that? ???

LonghornBronco
03-04-2009, 10:04 AM
Cars are the worst kind of debt and credit cards worse than that. I think you can count the millionairs on one hand who have car loans and more than 5% of their net income on plastic. I would put money on it!

Florida_Bronco
03-04-2009, 10:07 AM
Cars are the worst kind of debt and credit cards worse than that. Again, that simply isn't true. Care to explain your reasoning? ???

I think you can count the millionairs on one hand who have car loans and more than 5% of their net income on plastic. I would put money on it!

That's because they have the money to pay cash for such items. The average Joe doesn't have that luxury.

LonghornBronco
03-04-2009, 10:14 AM
Again, that simply isn't true. Care to explain your reasoning? ???

If you take the average car note (about 6 years at 10%), the second you drive it off the lot you owe more than it is worth until about the 4th year when the pricipal catches up with the depreciation. I'll send you a link on this.

That's because they have the money to pay cash for such items. The average Joe doesn't have that luxury.

How do you think they become rich? It's not by borrowing money to buy depreciable assets. I read this book called the Millionaire next door (great book by the way)m and it gives all sorts of examples (backed up by statistical research) of how self made millionaires made and keep their millions. You should check it out. I always refer to this book before making a big financial decision.

Florida_Bronco
03-04-2009, 10:16 AM
How do you think they become rich? It's not by borrowing money to buy depreciable assets. I read this book called the Millionaire next door (great book by the way)m and it gives all sorts of examples (backed up by statistical research) of how self made millionaires made and keep their millions. You should check it out. I always refer to this book before making a big financial decision.

We're not talking about millionaires, or how to become a millionaire. :kiddingme

Florida_Bronco
03-04-2009, 10:17 AM
If you take the average car note (about 6 years at 10%), the second you drive it off the lot you owe more than it is worth until about the 4th year when the pricipal catches up with the depreciation. I'll send you a link on this.

Yes, I'm very well aware of the depreciation, but that doesn't make it bad debt.

Beantown Bronco
03-04-2009, 10:18 AM
If you take the average car note (about 6 years at 10%),

Not that I disagree with your primary point, but the average car note is not anywhere near 6 years. Over 75% of people get either 3, 4 or 5 year loans. You can't even get a car loan at most places for anything longer than 6 years.

Fedaykin
03-04-2009, 10:22 AM
Yes, I'm very well aware of the depreciation, but that doesn't make it bad debt.


A car loan is only bad debt IF the value of the car is less than the amount of the loan yet to be repaid. The example note given would only be bad assuming the amount of the loan was more than the depreciated value of the car.

Mountain Bronco
03-04-2009, 10:26 AM
Flordia please explain why credit card and car loans aren't bad debt.

Tombstone RJ
03-04-2009, 11:06 AM
Cars are the worst kind of debt and credit cards worse than that. I think you can count the millionairs on one hand who have car loans and more than 5% of their net income on plastic. I would put money on it!

Cars are bad debt, yes, for the most part, yes. However, there are some exceptions.

If you can buy a vehicle that won't depreciate significantly the minute you drive it off the lot, then it's a decent investment. Those vehicles, however, are the super high end cars like Ferraris, Porsches, Mercedes (not the SUV crap, I'm talking SLs and AMGs) and others of like kind. These should be looked at as investments, not just transportation. Few can afford them because they are expensive, and hold their value.

However, when you go down to your local Ford/Chevy/Chrysler dealer and buy a $45k SUV that depreciates $10k the moment you pull it off the lot, and $20k the first year you own it, then that is a bad debt. That flat out sucks ballz. That is true with 95% of the vehicles you can buy. The bad news is, most people don't pay cash for these vehicles, they finance them. It's utter stupidity.

55CrushEm
03-04-2009, 11:12 AM
This is a funny discussion.

What determines whether or not a debt is "bad"...is NOT what you buy with the funds (car, etc.). It is based solely on whether or not that debt gets REPAID.

If someone defaults on the money they owe to someone else....then you have a bad debt. If it gets repaid in full....the debt was never "bad".

Florida_Bronco
03-04-2009, 11:14 AM
Flordia please explain why credit card and car loans aren't bad debt.

I'm still waiting to hear what makes them bad. :P

But first off, what is bad about an auto loan? Sure, you have to make payments on it and the value will depreciate, but at the same time you're getting a new vehicle with a warranty. Also, auto loans are great for building up credit, and that good credit could get you cheaper rates on everything from credit cards to mortgages. :thumbsup:

Now with credit cards, there is nothing bad about them or carrying debt on them provided (as with all things) you are responsible and plan accordingly. Sure, you'll probably have to pay a little bit of interest but just like auto loans, credit cards will boost your credit score and that in turn can get you low interest credit cards.

Also worth noting is that those with good credit can get credit cards with no interest for some amount of time, up to 18 months in some cases. Also you can get rewards cards that give you airline miles, cash back, or other rewards. I have a good friend of mine who charges everything to his credit card, but he pays it off in full every month. Last year he received over $500 worth in cash back and rewards and didn't pay a penny in interest. :thumbsup:

Florida_Bronco
03-04-2009, 11:16 AM
Cars are bad debt, yes, for the most part, yes. However, there are some exceptions.

If you can buy a vehicle that won't depreciate significantly the minute you drive it off the lot, then it's a decent investment. Those vehicles, however, are the super high end cars like Ferraris, Porsches, Mercedes (not the SUV crap, I'm talking SLs and AMGs) and others of like kind. These should be looked at as investments, not just transportation. Few can afford them because they are expensive, and hold their value.

However, when you go down to your local Ford/Chevy/Chrysler dealer and buy a $45k SUV that depreciates $10k the moment you pull it off the lot, and $20k the first year you own it, then that is a bad debt. That flat out sucks ballz. That is true with 95% of the vehicles you can buy. The bad news is, most people don't pay cash for these vehicles, they finance them. It's utter stupidity.

I totally understand your logic, but a bad investment and bad debt aren't neccesarily the same thing.

Tombstone RJ
03-04-2009, 11:21 AM
As another poster pointed out, bad debt is simply uncollectible debt. But, we are mixing up what bad debt is compared to what a bad investment is. I agree, two different things.

Florida_Bronco
03-04-2009, 11:26 AM
As another poster pointed out, bad debt is simply uncollectible debt. But, we are mixing up what bad debt is compared to what a bad investment is. I agree, two different things.

Yeah, when the OP said "bad debt" I think he was asking about when do you have too much debt. As you and others mentioned, the technical term for bad debt would be debt that is uncollectible. :thumbsup:

LonghornBronco
03-04-2009, 08:23 PM
Son, you are missing the point.

The reason I sited that book is because the people profiled in it are "smart with their money" hence they have become millionairs. If I wanted advice on how to build muscle I would listen to body builders, conversly if I want financial advice I would follow the advice of someone who was good with their money.

Buying a new car on credit is one of the most stupid things a person can do with their money (second to racking up credit cards).

Try to follow this example.

guy wants a car, his two options are buy new 5k down with a 5 yr note at 10% interest (total amount paid = 62k and change at the end of the note). Option two take 3k buy a used beater and put the remaining 2k plus the $300 you would have spent on the monthly payment into a mutual fund and at the end of 5 yrs you will have 24k to pay cash for your next ride.

Lets say you want a different car in year 3, you would have to take out a loan to pay the difference between the outstanding balance owed and what the dealer will give you for it (depreciation is about 60% on a new car in the first 4 years). Sorry you don't have any "equity" to roll into your next car. If you bought a used car and wanted to change, you sell your used car for probably 10% less than you payed (2700) and all of that money plus what you have saved and the interest on that money goes tword the car of choice (based on this example about 15230). Lets back up and look at what you have value wise in year three

new car = -5000 -2500 -10800 = -18300
Used car = 15230 + 2700 = 17930

So is a new car loan "bad debt"? I guess it's a relative question, but I don't have 36k to rent new car smell for three years.

watermock
03-04-2009, 09:05 PM
Also, what is the deal with these debt consolidation companies???

The commercials scream RIP-OFF but why would they exist if they are so

Don't expect debt councelors to restore your credit.

lostknight
03-04-2009, 09:49 PM
First of all, thanks for asking the question. I work at a large financial services firm (one that is not a bank) and I am watching this abyss come closer and closer to a lot of people.

If your DTI is above 33% you could be in trouble. If it's above 40%, you are in trouble pure and simple. The number that I think you care about is actually the back ratio DTI (from wikipedia) the percentage of income that goes toward paying all recurring debt payments, including those covered by the home mortgage + other payments, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.

We have always justified treating home mortgage debt separate from overall debt, because the thinking is that home is a investment, not a liability. The crash is proving otherwise. In my personal opinion, your back ratio debt should be around 33% of your overall income. If you make 100k a year, that means no more then 30k in mortgage payments + visa payments a year.

That ansers the question of if you are in trouble. The question of if you are getting totally played by the credit companies and flushing money down the toilet is true if you answer yes to the following question: Do you keep a balance on the card. If so you are blowing huge money on interest rates that are highway robbery.

My favorite resource is acutally http://www.suzeorman.com/. I don't agree with her politically, but her comments tend to be right on in terms of money management.

robbieopperude
03-04-2009, 09:57 PM
Bad Debt = Michael Vick

nickademus
03-04-2009, 11:15 PM
I'm still waiting to hear what makes them bad. :P

But first off, what is bad about an auto loan? Sure, you have to make payments on it and the value will depreciate, but at the same time you're getting a new vehicle with a warranty. Also, auto loans are great for building up credit, and that good credit could get you cheaper rates on everything from credit cards to mortgages. :thumbsup:

Now with credit cards, there is nothing bad about them or carrying debt on them provided (as with all things) you are responsible and plan accordingly. Sure, you'll probably have to pay a little bit of interest but just like auto loans, credit cards will boost your credit score and that in turn can get you low interest credit cards.

Also worth noting is that those with good credit can get credit cards with no interest for some amount of time, up to 18 months in some cases. Also you can get rewards cards that give you airline miles, cash back, or other rewards. I have a good friend of mine who charges everything to his credit card, but he pays it off in full every month. Last year he received over $500 worth in cash back and rewards and didn't pay a penny in interest. :thumbsup:

Wow. where to start as far as credit cards go if you are paying them off every month and taking advantage of the benifits that these companies offer then its not bad debt or good debt it is paid so this doesnt apply and really who does this? The reason a car loan is bad debt is that not only do you usually owe more than the car is worth the second you drive it off the lot in the end a car is a disposable item and aside from collectors items they will never go up in value. Also unless your credit is spotless your intrest rate will be 7-10% and by the time you pay the car off you will have paid twice the purchase price for an item that has verry little value. A better plan would be to save the money you would spend on a car payment for a year and then buy something used that has already deprecheated. Bad debt is anything that you purchase that does not either grow in value or generate some form of income. most people believe a home mortgage is good debt but I doubt that people who have lost their homes in the recent buble burst would agree. But historically realestate has been considered a good investment and should probably be considered good debt. A business loan is good debt if the business is generating more than the loan payment plus the operating cost. The only argument you make that even comes close to making sense is that by incurring debt that you pay off or carry you develop a good credit history which should in theroy decrease the cost of future debt. that is it. Debet can be a very powerful tool but most people only generate consumer debt which is the worst kind.

Archer81
03-04-2009, 11:17 PM
what is the opposite of "good credit"?


:Broncos:

Blueflame
03-05-2009, 12:07 AM
Student loan debt isn't a bad debt. It's just an uncomfortable one. It's pretty much a given that students these days will leave with a fair amount of debt. 50-150k in student loans depending on the field is pretty common. Just means you have to be smarter about your money when you get out there.

Fortunately it's not like they can reposes your education.

No... but if you have a defaulted student loan, your income tax refunds will all be "offset" until the debt is paid. And if you still owe $$ on a student loan at retirement age, they'll withhold your Social Security,too.

Beantown Bronco
03-05-2009, 06:04 AM
Even in a market like this one where home values are tumbling, mortgage debt is still good debt for one very important reason that hasn't been mentioned yet: mortgage interest deductions.

400HZ
03-05-2009, 06:17 AM
Even in a market like this one where home values are tumbling, mortgage debt is still good debt for one very important reason that hasn't been mentioned yet: mortgage interest deductions.

:yayaya:

Florida_Bronco
03-05-2009, 07:32 AM
Son, you are missing the point.

The reason I sited that book is because the people profiled in it are "smart with their money" hence they have become millionairs. If I wanted advice on how to build muscle I would listen to body builders, conversly if I want financial advice I would follow the advice of someone who was good with their money.

Buying a new car on credit is one of the most stupid things a person can do with their money (second to racking up credit cards).

Try to follow this example.

guy wants a car, his two options are buy new 5k down with a 5 yr note at 10% interest (total amount paid = 62k and change at the end of the note). Option two take 3k buy a used beater and put the remaining 2k plus the $300 you would have spent on the monthly payment into a mutual fund and at the end of 5 yrs you will have 24k to pay cash for your next ride.

Lets say you want a different car in year 3, you would have to take out a loan to pay the difference between the outstanding balance owed and what the dealer will give you for it (depreciation is about 60% on a new car in the first 4 years). Sorry you don't have any "equity" to roll into your next car. If you bought a used car and wanted to change, you sell your used car for probably 10% less than you payed (2700) and all of that money plus what you have saved and the interest on that money goes tword the car of choice (based on this example about 15230). Lets back up and look at what you have value wise in year three

new car = -5000 -2500 -10800 = -18300
Used car = 15230 + 2700 = 17930

So is a new car loan "bad debt"? I guess it's a relative question, but I don't have 36k to rent new car smell for three years.

Again, you're arguing that buying a new car is a bad investment (and it is) but that doesn't neccesiarly make it a bad choice to buy new.

If you're going to get a new car every few years there are better options for you like leasing and what not, but that wouldn't apply to 99% of the middle class families I know, my own included. Most middle class families will purchase a new car and drive it for years and tens of thousands, if not a hundred thousand miles. At that time, they might sell it and buy something new again.

In that situation, it's unrealistic to say that they didn't get their money's worth.

Florida_Bronco
03-05-2009, 07:33 AM
Wow. where to start as far as credit cards go if you are paying them off every month and taking advantage of the benifits that these companies offer then its not bad debt or good debt it is paid so this doesnt apply and really who does this? The reason a car loan is bad debt is that not only do you usually owe more than the car is worth the second you drive it off the lot in the end a car is a disposable item and aside from collectors items they will never go up in value. Also unless your credit is spotless your intrest rate will be 7-10% and by the time you pay the car off you will have paid twice the purchase price for an item that has verry little value. A better plan would be to save the money you would spend on a car payment for a year and then buy something used that has already deprecheated. Bad debt is anything that you purchase that does not either grow in value or generate some form of income. most people believe a home mortgage is good debt but I doubt that people who have lost their homes in the recent buble burst would agree. But historically realestate has been considered a good investment and should probably be considered good debt. A business loan is good debt if the business is generating more than the loan payment plus the operating cost. The only argument you make that even comes close to making sense is that by incurring debt that you pay off or carry you develop a good credit history which should in theroy decrease the cost of future debt. that is it. Debet can be a very powerful tool but most people only generate consumer debt which is the worst kind.

Again, you're saying that a bad investment is "bad debt" and that's not really the case.

JJG
03-05-2009, 07:53 AM
The part about credit card and auto loans being bad debt. It's simply not true.



His approach isn't much more than common sense when it comes to paying down debt. His "no credit" way of life that he propagates is a very bad idea though.

I know Im a little late here and alot of this has been covered but heres my .02

We have created a fallacy of instant gratification. I want it, and I want it now because it feels good, the future can be damned. People buy houses they have no buisness buying, with no downpayment and almost zero savings and a huge mortgage payment or an ARM, and then they are surprised when they can no longer afford it. Credit cards are another perfect example. I don't have the money now but this little plastic thing will allow me to get it now. I'll just pay it off later. The problem is that "later" never comes and before you know it, you owe $30,000 to the credit card company at 12% interest for what is essentially an advance on your own money.

I understand life is hard and will give you unexpected twists. Its real easy to use the credit card. I believe it makes people devalue money. It's less real to alot of people because everyone thinks thing will be better in the future, we will be making more money and we can easily pay this off. Unfortunately, this is not often the case.

I'll agree that alot of Dave Ramseys approach is not much more than common sense, but most people have zero common sense or (maybe more importantly) discipline financially. He at least gets people thinking about their money, and it gets people on track. I'll also agree that he is far more conservative than most, and I do not totally agree with his views of student loans or mortgage payments. But most people would be far better off following his method than the way they are now.

My wife and I both have pretty modest incomes. We have paid off $10,000 in debt from a couple credit cards, a line of credit, and a few other things since we've been married (18 months). My car needed some work last month, I paid cash for the $700 bill (something I never thought would be possible 2 years ago). I was not happy about the bill, but it was comforting to know it wasn't going on a credit card, and it wasn't going to ruin me financially.

JJG
03-05-2009, 08:08 AM
Again, you're saying that a bad investment is "bad debt" and that's not really the case.

his verbiage is wrong, but you missed his point.

nickademus
03-05-2009, 08:18 AM
Again, you're saying that a bad investment is "bad debt" and that's not really the case.

No I am saying that if the investment does not generate some value either in appriecation or cashflow it is the debet incurred to aquire that investment is bad debt.

Florida_Bronco
03-05-2009, 08:30 AM
his verbiage is wrong, but you missed his point.

No, I understand his point, and it's a very good point if you're talking about investments. But again, just because something is a bad investment doesn't mean it's "bad debt." Things like cars, furniture, electronics...all of those will generally only decrease in value yet they are essential to our everyday life.

Florida_Bronco
03-05-2009, 08:35 AM
No I am saying that if the investment does not generate some value either in appriecation or cashflow it is the debet incurred to aquire that investment is bad debt.

Again, we're not talking about investments. ???

Mountain Bronco
03-05-2009, 08:37 AM
Good explination Florida. I agree that all car debt isn't bad nor is all CC debt. I recently bought a new SUV, financed almost all of it for 0%. I can afford it and am paying zero interest over 5 years, so nothing is bad about that debt.

Quality discussion on the OM. Who would have thunk?

JJG
03-05-2009, 08:51 AM
No, I understand his point, and it's a very good point if you're talking about investments. But again, just because something is a bad investment doesn't mean it's "bad debt." Things like cars, furniture, electronics...all of those will generally only decrease in value yet they are essential to our everyday life.

Some are essential, others are luxuries.

Since they all decrease in value, wouldn't it make the most sense (financially) to "invest" as little as possible into it, and to do so with your money instead of paying someone else for an advance?

Tombstone RJ
03-05-2009, 12:02 PM
Many good posts here. I think another distinction needs to be made. People do have to build credit and some ways of doing that are credit cards and car loans. Paying bills on time is another way to build credit (gas, electric, cell phone, etc). All are ways to build credit in order to receive future loans with good interest rates (heck, to get a loan at all from most banks).

This of course is different than business loans and operating a business, which relys on cash flow. A business has to be able to operate as efficiently as possible not only because it has to pay its operating expenses (pay roll, insurance, mortgage or rent, inventory, utilities, other expenses like travel, and office equipment/supplies) but also becuase it has to like, show a profit. That is, it has to have a net profit, if it wants survive. All of this can be considered good debt, if the books are in order and ownership/managment knows what the hell its doing.

Florida_Bronco
03-05-2009, 12:35 PM
Many good posts here. I think another distinction needs to be made. People do have to build credit and some ways of doing that are credit cards and car loans. Paying bills on time is another way to build credit (gas, electric, cell phone, etc). All are ways to build credit in order to receive future loans with good interest rates (heck, to get a loan at all from most banks).

This of course is different than business loans and operating a business, which relys on cash flow. A business has to be able to operate as efficiently as possible not only because it has to pay its operating expenses (pay roll, insurance, mortgage or rent, inventory, utilities, other expenses like travel, and office equipment/supplies) but also becuase it has to like, show a profit. That is, it has to have a net profit, if it wants survive. All of this can be considered good debt, if the books are in order and ownership/managment knows what the hell its doing.

Great post. The only thing I want to correct is the line about utilities improving your credit score. Those type of things hardly ever show up on your credit report since they are providing a service rather than extending you credit. They only show up on your credit if you get delinquent and they go to collection.

Now there are a few companies out there that have decided to report those things to the credit bureaus, but I haven't ever used any of them.