Types of Healthy Debt

Give Your Spending Habits a Checkup to Achieve Financial Fitness

San Mateo, Calif. - With credit easier than ever to get, mortgage rates on the rise, and U.S. savings rates reaching a 73-year low, it’s no surprise that total consumer debt has reached epidemic proportions, sitting at an all-time high of $2.2 trillion (excluding mortgages), according to the Federal Reserve. The good news? Not all debt is bad debt. There is such a thing as "healthy debt." Consumers who understand - and learn to manage - "good" debt can be on the road to financial fitness quicker than ever, says Bradford G. Stroh, Founder of Bills.com. "Poorly managed debt can lead to trouble, but some types of debt can be healthy in limited amounts," explains Stroh. "American culture is founded on consuming. Some purchases are necessary - for medical bills, education, housing. Others are purely for pleasure - none of us needs an iPod or a daily designer-coffee fix." Generally, only four types of debt can be healthy, according to Stroh:

  1. Student loans -- Further one’s education and increase future earning potential.
  2. Mortgages -- Home ownership is an asset that can build equity and net worth.
  3. Necessary medical bills -- One’s health always takes priority.
  4. Business debts -- Often necessary to build a business and future earnings.

All other types of debt - especially credit card debt - create more problems than they solve, says Stroh. The average household now has 6.3 bank credit cards, 6.4 retail credit cards and 2.2 debit cards, for a total of 14.9 credit cards. The average interest rate on these cards is 14.24 percent, but there are no usury laws for credit card debt: If you miss a credit card payment, your interest rate can skyrocket over 30 percent. About 20 percent of all credit cards are "maxed out" by their owners. To manage personal business, most people need to own at least one credit card. However, multiple credit cards are not necessary, and consumers never should carry a credit card balance. Stroh advocates paying the full balance monthly, or using a debit card instead of a credit card so that balances cannot accumulate. "Healthy debt" must meet several qualifying criteria:

  • The debt must be limited, without the ability to continue increasing (a revolving account, such as a credit card, is not limited, and increases as you add more to it).
  • The debt’s interest rate must be stable, at a reasonable, predictable level.
  • The debt must have regular payment amounts that are manageable within a budget, on time to avoid late fees and penalty interest-rate increases.
  • The debt must have been acquired for a purpose that an average person would say was sensible. (A good test is whether you will be able to remember in six months why you have the debt -- coffee drinks or CDs usually can’t pass this test.)
  • The debt is incurred for something that can appreciate, such as buying a home or investing in a business.

Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com’s partner company, Freedom Financial Network (www.freedomfinancialnetwork.com), has provided consumer debt resolution services, serving more than 7,500 customers nationwide and managing more than $250 million in consumer debt. The company’s co-founders and CEOs, Andrew Housser and Brad Stroh, were recently named Northern California finalists in Ernst & Young’s 2006 Entrepreneur of the Year Awards.