'The Good Debt, Bad Debt Game...' poll discussion 14 July 2009 at 3:46PM edited 21 July 2009 at 5:17PM in Money Saving Polls 26 replies 7.6K views

MSE_Martin

Poll between 14-21 July 2009:

The Good Debt, Bad Debt Game...

In the Teen Cash Class I ask a series of questions to explain the difference between good debt and bad debt. Here’s a version of the trickiest...

A single dad who’s just been made redundant gets a new job in the country. He lives eight miles from work and his young children go to school ten miles the other way. There’s no public transport, so he needs to get a car or he can’t work.

The cheapest possible reliable car is £1,500, but the cheapest debt rate is 12% and the repayments will be tough... is it

A. Good Debt - 63% (5938 votes)
B. Bad Debt - 37% (3424 votes)

This vote has now ended, but you can still click 'post reply' to discuss below.

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Thought you may be interested in the full good debt bad debt lesson (though do see the Teen Cash Class for the whole thing)

GOOD DEBT, BAD DEBT… AND KNOWING THE DIFFERENCE

Now you understand what debt is. It’s important to realise that, as nasty as it can be (and trust me sometimes it is) you are not going to be able to avoid it.

So what’s important is learning when it’s right to borrow, and to understand the best way to do it. Let me start with the quick quiz I gave the Teen Cash Class…. Test yourself on which of these you think are good and bad debt.

A. You want to go on holiday because you haven’t been away for three months, but you’d need to pay for it on a credit card. Good debt or bad debt?

B. You recently got married and now it’s time to get your own house. You need to borrow money by getting mortgage in order to do so. Good debt or bad debt?

C. You’ve just got a new job, moved house and live eight miles from work and your children go to a school that’s ten miles away. There’s no public transport, so you borrow money for a car. Good debt or bad debt?

D. You have a store card with a limit of £500, and you’re off to a big party tonight. You see some top party clothes that cost £250, so you go for it. Good debt or bad debt?

Of course, no debt is truly ‘good’ as you don’t want to borrow anything from anyone, but ‘necessary and unnecessary debt’ was too long a phrase!

The Answers...

A. The Holiday.. Bad debt! The clue is in the question. If you can’t afford it and don’t need it, don’t go into debt for it! A holiday is a luxury that you can live without for a few months while you save enough
money to pay for it a better way.

B. A House. Good debt! Going into debt for some things is unavoidable, and a house is usually one of them. If you need to get a mortgage to get your own place, find the best deal you can and consider it an investment in your future – though only do it if you can afford the repayments and you won’t be hurting the rest of your finances.

Note from ML: This is deliberate to show debt can be ‘good’ it was written before the house price crash, which of course adds an extra dimension – even so for long term investment borrowing to buy a house, like student loans are the building blocks of my“we sometimes have to borrow so lets teach them how to borrow” philosophy

C. A Car. Good debt! If you need a car and can’t buy one out of your own pocket, then borrow for one wisely. This isn’t bad debt because having the car (as long as you get a good deal!) will improve your quality of life and enable you to earn money. Yet as you're borrowing, try and get the cheapest workable car, don’t spend more than you need to, ensure you budget for your repayments, check that the interest
rate is cheap, and pay it off as quickly as possible

Note from ML: In person when I speak I often call this grey debt – the real lesson here is there are sometimes no right or wrong, we cannot know without hindsight what is important.

D. Party Clothes. Bad debt! If you got this one wrong, shame on you! Feeling like you’ve got nothing to wear is no excuse for impulse shopping or buying something you can’t afford. Even worse is putting this crazy purchase on a store card, which as you’ll soon see have stupidly high interest rates. Remember, they’re the devil’s debt – designed to trap you!

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JayZed

The cheapest debt rate is 12%? Why doesn't he pay for the car with a 0% credit card, pay it off monthly and tart when the 0% deal ends if he hasn't paid it off by then?

MSE_Martin

JayZed wrote: »

The cheapest debt rate is 12%? Why doesn't he pay for the car with a 0% credit card, pay it off monthly and tart when the 0% deal ends if he hasn't paid it off by then?

Why.. because those are the facts you have to work with - like any test

He can't get a 0% card, the cheapest debt he can get is a 12% bank loan. Sadly not an unrealistic scenario (though 12% is more likely to be 18-25% but that skews the question a way I didnt want it toO)

ThinkingOfLinking

Although I agree with you that generally speaking D is bad debt, it CAN be good if you use it to take advantage of a discount evening/get a free gift with purchase and can pay it off IN FULL when the bill arrives. I've had 2 goody bags worth £35 from New Look by using a store card on a special customer evening, only to pay everything off in full as soon as I got the bill.

isofa

If he cannot get any other job, and cannot get to the school any other way, then it's unavoidable and therefore a "good debt", however there is always a better way IMO!

MSE_Martin

Flickering_Ember wrote: »

Although I agree with you that generally speaking D is bad debt, it CAN be good if you use it to take advantage of a discount evening/get a free gift with purchase and can pay it off IN FULL when the bill arrives. I've had 2 goody bags worth £35 from New Look by using a store card on a special customer evening, only to pay everything off in full as soon as I got the bill.

OF course - as explained here... http://www.moneysavingexpert.com/cards/store-card-discounts

Though then it wouldn't be a debt... and also when teaching kids best to start with the simple rules.

beanielou

But Im maybe being dense.
But how is he going to pay for it?

ThinkingOfLinking

Beanielou - which one?

If you mean the car debt, the OP says that without the car, he wouldn't be able to work, so it's a means to him earning money; therefore he'd repay the debt out of some of his wages.

SnowMan

Was in a local school yesterday with some other volunteers from the CAB to provide financial skills training for some 15 year olds.

We talked about good and bad debt as it happened in one of the sessions I was running. It is easy to get students to discuss and understand the difference between mortgages and student loans potentially being good debt, and high interest credit card debts for luxury items being bad debt, but it is difficult to explain the difference between a good and bad commercial loan of this kind.

Wish I had had that example to use!!!!!!

Could have done with Martin coming along :rotfl:

rag31

This surely is a no-brainer. In this situation there is no alternative to get him to work so it must be a good debt. Or if not 'good' then 'essential' or 'unavoidable'.

Becky

Tojo_Ralph

Whilst I appreciate the intent of the question and the dumbing down element of the site, I still feel that advocating the application of blanket policies without being in possession of the facts leads to a limited and skewed understanding of a given principle.

My first question with regards to the question posed is what is the significance of mentioning the childrens school location?

Given that the father does not own a car, one assumes that the children will continue to travel to and from school without the assistance of their father by whatever mode of transport they have used to date?

This then brings us to the father and whether or not he takes on the debt associated with buying a car to permit him to travel to work.

a) Is the position a permanent one or a temporary one?
b) Does the salary justify the purchase and the travel or is this a minimum wage position that will leave the family struggling?
c) What are the other costs associated with the vehicle? Insurance? Road Tax? Maintenance? Fuel Consumption? Etc, Etc.
d) Having purchased the car, is the income from employment sufficient that with all bills paid etc, the father can make the repayments on the vehicle, Monthly insurance premium, fuel etc?
d) What are the alternatives? Social Security? Retraining? Waiting for a more suitable position?

If the father buys a car to accept a position paying the minimum wage for unsociable hours in an industry that is struggling with the recession when there are alternatives that are financially more attractive and viable with one eye on the long game..... Is it Good debt... or Bad debt?

It's all well and good saying no-brainer, but without basic facts, IMHO, one cannot begin to answer the question.
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