Good debt, bad debt and the worst

TREASURER Scott Morrison has distinguished between good debt and bad debt concerning the Federal Budget but how does that translate to your household budget?

“Good debt is debt that helps increase assets or net wealth,” Louis Christopher, managing director of SQM Research, said. “This could include real estate, shares or investing in a business. Bad debts are basically debts on consumerism. They don’t add to wealth but can take wealth away.”

Home loans, student loans, shares and even investing in your own small business are accepted examples of good debts, while bad debts may include car loans, personal or payday loans and credit cardswhich have average repayment rates of 17 per cent, despite savings and home loan interest rates being at all-time lows.

But there are bad debts and then the worst debts, according to economists. Borrowing for a holiday using a high interest credit card is one of the worst, Mr Christopher said.

“A great experience is great, but you’ve got nothing to show for it. It’s like a massive hangover,” he said. “I would never take out debt to go on a holiday.”

Meanwhile, AMP economist Dr Shane Oliver said money should never be borrowed for gambling purposes.

“Borrowing on credit to participate in some form of gambling is the worst debt,” Dr Oliver said. “You’ve lost money and are paying it off but have nothing to show for it.”