"Good debt" is an illusion

Over the last several years that I’ve been working to get out of this ginormous hole created by my lengthy unemployment back in 2008 into early 2009, I’ve had a lot of time to reflect on debt, debt collections and the like, and I like to think that I’ve gained a lot of wisdom in that time. As such, when I come across articles talking about debt, I tend to wonder whether the people writing it have been in the same hole… I mean chasm into which I and many others have fallen.

This chasm is, of course, a chasm of debt.

As such, one fallacy that I continuously see flung around on the Internet is the classification of debts as "good" and "bad". The latest incarnation of this to cross my path is from Manilla LLC, which is New York-based company providing a web-based organization system for accounts and bills. According to the New York Department of State, the company has existed since about 2009.

In a recent blog article called "Is Your Debt Normal?", Manilla LLC marketing manager Caroline Wright also falls into the fallacy of categorizing debt as either "good" or "bad".

Let’s clear the air first. There is no such thing as "good" or "bad" debt. There is just debt and the obligation to pay on your loan and credit contracts. There is nothing good about debt, and certainly plenty that is bad, yet many still refuse to see that. It boggles my mind how people advocate putting extra money into investments instead of into paying off your debts.

Yet many people justify "good debt" by calling them "investments", and Ms Wright is no different:

Although not fool proof, investments in education, retirement, or home ownership are all considered good debt — if you can afford to pay it off. These are typically low-risk investments that tend to yield high ROIs.

Except debt is not an investment. Well for you it isn’t. You aren’t the one making the investment. The bank that loaned you the money is the one making the investment in you and is putting a lien on your future. What you get out of the deal is debt and an obligation to pay back what you borrowed and then some.

When you acquire a mortgage, it isn’t you investing in a house. The bank or mortgage company holding the note made the investment. Don’t kid yourself into thinking otherwise. The only thing you have is debt and an obligation to pay back upwards of three times what you borrowed across the life of the loan or whomever holds the note will seize your house to sell it off and you’re left with nothing.

Debt is an obligation where you owe back to the creditor more than you borrowed. The technical term for this is usury, and it is a concept long condemned as sinful under today’s prominent religions, yet I see many religious individuals talking about debt in terms of "good" and "bad". That is blatant hypocrisy.

The fact that virtually all debt today is usurious means that you cannot classify any of it as good debt. But even if debt weren’t usurious, it still lacks sense to classify any debt as "good debt" because any debt for which you fall into default can ruin you, even those debts that many seem willing to classify as "good".

To call any debt "good debt" requires saying that there’s a such thing as "good slavery" and "bad slavery", because debt is slavery. It is financial slavery, as you agree to commit part of your future earning potential to pay off your debts. This means someone else has a claim to the fruits of your labors. There is nothing good about that, and the negatives of "bad debt" apply to all debt:

Interest rates on credit cards are considerably higher than the rates on loans, meaning you will pay more over time, and payment schedules are set to maximize the profit for the creditor. Also, missing or paying late on a credit card payment results in high penalties and can seriously impact your credit score.

Interest rates are higher on credit cards because credit cards are unsecured, revolving loans. This means that if you default on your credit cards, such as by missing a payment or stopping payments altogether, there is nothing the creditor can immediately seize and sell to recover the due amount. Unsecured debt is riskier debt, and interest rates reflect the risk.

But if you miss a payment or fall behind on any debt, your credit score and future ability to obtain credit will be negatively affected, and the situation becomes more bleak when foreclosures and repossessions become involved. Interesting how Ms Wright classifies mortgages as "good debt", or at least considers them good debt while you’re still making your mortgage payment.

But it gets worse:

If you feel comfortable with your current level of debt and have no issues making your monthly payments then taking on more debt may be an option for you. Note, your total amount of debt does not matter as much as your ability to make monthly payments.

Taking on more debt requires you plan for it. The statement that your ability to pay your debt matters more than your current debt load is only partly true. The one thing you need to bear in mind is that if you lose your source of income, regardless of how that happens, all of that debt will come crashing down around you.

Debt is in many ways like a commercial aircraft. So long as the engine is running, the aircraft will stay aloft and make it to its destination. In this analogy, the engine and fuel running it is your current income stream. If the engine dies or the plane runs out of fuel while it is still aloft, it won’t remain that way for long. If your income stream goes away, your debt comes crashing down around you. And when that happens, you have the potential to lose nearly everything.

This is why I say there is no such thing as "good debt". There is only debt, and so long as you can keep that debt plane aloft, you’ll be fine. But just as commercial pilots plan and prepare for contingencies, so must you.

But this doesn’t mean you cannot use debt to your advantage. It all depends on the costs you are taking on versus the costs you are avoiding. Everything has a cost, and you need to do a cost/benefit analysis before you take on any new debt.

But avoid the mindset that certain debts are good and others are bad. That is a fallacy. What you’re financing matters nowhere nearly as much as the fact you are financing it. Debt means you owe part of yourself and your future to someone else, and it almost always means you will end up owing to your creditors more than they lent to you. So long as you keep that in mind, you should be able to maintain the proper perspective with regard to your financial outlook.