💰️ Good Debt vs. Bad Debt: How to Make Smart Borrowing Decisions

Hey Wicked Club fam!

Hope you’re having a fantastic week so far! Before we dive into this week’s topic, I want to share a quick recap of our “Credit and Chill” picnic from last week. We had a blast with friends, swapping credit stories, tips, tricks, wins, and even a few lessons learned. We also made sure it was fun with all the board games, snacks, and cute Polaroid pictures. Overall it was such a vibe, and we can’t wait to host more events like this in the future. Attaching some pictures from the event towards the end :)

🗒️ This week’s rundown:

• Topic of the week: Good Debt vs. Bad Debt: How to Make Smart Borrowing Decisions

• Pooja, What’s In Your Wallet?

💰️Good Debt vs. Bad Debt: How to Make Smart Borrowing Decisions

This might be something you don’t hear people say often, but not all debt is bad. While it’s true that some debts can be a financial minefield, others can be powerful tools for building a better future. Let’s clear up the confusion and explore how to harness debt wisely.

First off, let's shatter the stigma. Having debt doesn't automatically make you a financial failure. We need to start looking at debt as an essential tool available for us to hit important milestones in life. Whether it’s buying a house or starting your own business, many successful people have used debt strategically to achieve these types of goals. The key lies in understanding the difference between good debt and bad debt.

🟢 What Is A Good Debt?

Good debt is generally considered any debt that may help you increase your net worth or generate future income. It’s important to note that good debt typically has a low interest or annual percentage rate (APR), which is normally under 6%.

Here are some examples of GOOD debt:

1. Mortgages:

   • Why It’s Good: A mortgage allows you to purchase a home, which can appreciate in value over time. Owning real estate can build equity and provide long-term financial stability.

   • Considerations: Look for favorable interest rates and terms, and ensure you can manage the monthly payments alongside other financial commitments.

   In the context of recent years, mortgage rates of 6.5% to 7% might be considered high compared to the ultra-low rates seen during the COVID-19 pandemic, where rates dipped below 3%. However, in a broader historical sense, it’s still reasonable but not exceptionally low.

2. Business Loans:

   • Why It’s Good: Funding a startup or expanding a business can lead to increased revenue and growth. Well-managed business loans can help you invest in inventory, marketing, and other critical areas that drive success.

   • Considerations: Have a solid business plan and understand the terms of the loan to ensure it supports your business goals.

🔴 What Is A Bad Debt?

Bad debt refers to borrowing that generally leads to financial strain and does not provide a return on investment or an increase in your net worth.

Here are some examples of BAD debt:

• Credit Card Debt: Credit cards often come with high interest rates. Carrying a balance can lead to expensive debt that grows quickly and can be difficult to manage.

• Payday Loans: Payday loans have extremely high interest rates and short repayment terms, which can trap borrowers in a cycle of debt.

• Personal Loans for Non-Essential Items: Taking out loans for vacations, luxury items, or other non-essential purchases can lead to debt that doesn’t provide long-term value or financial benefit.

🤔 Is a student loan a good debt?

Okay, I have some serious opinion on this topic, so this is going to be a mini article of its own.

The conventional wisdom paints student loans as a necessary investment in your future. However, I've come to a different conclusion. The idea of taking on substantial debt at such a young age, when career paths and life goals are still forming, is daunting.

While there are undoubtedly cases where student loans have been a catalyst for success, it's essential to approach them with caution. The job market is highly competitive, and not every degree guarantees a lucrative career. Moreover, the abundance of free online resources challenges the notion that a traditional college education is the only path to success.

I strongly advise exploring alternatives before diving into student debt. Consider vocational schools, apprenticeships, or online certifications that offer specific skill development without the hefty price tag.

Remember, student loans are a long-term commitment. It's crucial to have a clear career plan and understand the potential earning power of your chosen field before taking the plunge. Based on my personal experience, I've learned firsthand the challenges of managing student debt. It's a financial burden that can significantly impact your early adult years.

✅ Choosing the Right Debt

If you find yourself needing to take on debt, here are some things to consider:

1. Interest Rates: Look for the lowest interest rates possible. Lower rates mean less money paid over time.

2. Terms and Conditions: Understand the repayment schedule, fees, and any penalties for early repayment.

3. Purpose: Ensure that the debt aligns with your financial goals and will provide a return on investment or a tangible benefit.

👛 Pooja, What’s In Your Wallet?

This is one of the questions I get asked a lot. So, let's dive into the world of my credit cards. Honestly, I only started being strategic about my cards a few years ago. Some of these, I'm still scratching my head wondering why I even got them 😅 

Here’s a breakdown of the credit cards I own and why (in a random order):

1. Bank of America Customized Cash Rewards: This was one of my first few cards. I was drawn to its cashback potential and chose it since I was already a Bank of America customer. The card offers a 3% cashback category you can choose, making it great for online purchases, which I do frequently.

2. Bilt Mastercard: I’m a big fan of this card! It allows me to earn points on rent payments, which I previously had to pay with a debit card. It also offers solid rewards on dining and travel. Highly recommend it for its unique benefits.

3. Discover It: I used to religiously use this card but my spending habits have evolved. I still take advantage of its rotating categories when they align with my spending. It’s a valuable card for maximizing cashback.

4. American Express Platinum: I’ve held this card for over four years, and despite its hefty annual fee, it delivers outstanding travel benefits, lounge access, and exceptional customer service. While the fees might seem steep to some, I thoroughly explore all its offers and always find significant value. I’ve had great experiences with its travel protections, including coverage for a missed expensive international flight, making the cost well worth it. The benefits and customer service keep me loyal to this card.

5. Chase Sapphire Reserve: I initially got this card to compare it with the Amex Platinum and to take advantage of the welcome bonus. Though I planned to downgrade this card eventually, I’ve found a lot of value in this card too. However, I still plan to downgrade this card since there are a lot of overlapping benefits with the Amex Platinum. I look forward to getting their Chase Preferred card which is a popular choice for dining and travel.

6. Chase Freedom Flex: I got this card during a financially tough period when I was moving back to NYC from Virginia during COVID-19. The 0% APR for 16 months helped me manage moving expenses without depleting my savings. It’s a card with sentimental value for me.

7. Apple Card: I picked up this card when buying my MacBook and switching from Android to iPhone. With no annual fees and 2% cashback on Apple Pay purchases, it’s a practical choice for my Apple product purchases.

8. Citi Double Cash: I use this card solely for cashback purchases, offering a straightforward 2% cashback on all spending. It helps diversify my credit card usage while keeping spending low.

9. Amazon Prime Visa: I recently added this card and wish I’d done so sooner. It’s perfect for my frequent Amazon purchases, giving me rewards for spending where I shop the most.

Other Cards

I have a USAA credit card as an authorized user, which I don’t use, and my oldest card, the Deserve Edu Mastercard, was canceled due to inactivity. Don’t make the mistake of letting old cards lapse, as it can affect your credit history.

So that’s my wallet! I am finally doing a solid job of covering all my everyday expenses with the right card and getting all those amazing cashback and points. From rent to online purchases, I have a card for everything 😉 

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