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There’s No Such Thing as Bad Debt

I can’t remember how many times I’ve heard people classify debts as good debt and bad debt. And the definition is based on what the debt is for.

For example, mortgages and student loans [1] are classified as good debt, and auto loans and credit card debt [2] are often classified as bad debt.

I don’t agree. Classifying a debt based on the underlying asset makes no sense mathematically.

Expensive Debt vs Cheap Debt

Let’s look at it from a different angle. Right now, I like to focus on obtaining cheap debt at 3% or under. And some of the best places to get cheap debt are from 0% balance transfer credit cards [3] and auto loans.

You can get a 2.99% auto loan [4] at Penfed right now. And you don’t have to use it for a new vehicle, you can use it to refinance your current auto loan, use it to replace other higher interest rate debts, or even turn around and invest it in the 5% Certificates at Pentagon Federal [5].

Why on earth would we classify these as bad debts when they are cheaper than the good debts right now?

There’s really no such thing as a bad debt. The worthiness of debt should be assigned based on the price of the debt: cheap or expensive.

Leveraging Debt

Debt is nothing more than a tool to use for leverage. As a society, we have way too much emotional attachment to debt.

I’ve mentioned in the past that we used Creative Debt Reduction Strategies [6] to do things like using a 4% student loan to pay for part of our mortgage (which has since dropped to 3%), and used credit card balance transfers at 2.99% to finance a rental [7].

Now, before you tell me I’m crazy, you know I’m not going to advocate taking on debt to finance lavish trips or buy the latest gadgets. The debt I’m referring to is strictly used for the following:

  • Financing a house you would purchase anyways.
  • Refinancing debt you already have.
  • Financing semi-stable investments with higher projected returns.

Mental Accounting

To let yourself accept this strategy, you have to mentally stop assigning debt to certain assets. For example, while I do carry a 1.9% car loan… it’s not money that was used to purchase the car; the money was instead used to replace part of our mortgage at 4%.

Now the debt that was used to pay for our house is spread across a mortgage, a student loan, a car loan, and 3 credit card balance transfers that will run for life. We save several thousand dollars a year by maximizing the uses of “bad debts”!


One of the differences in comparing interest rates is obviously the tax impacts. I convert everything to an after tax interest rate to compare the interest rates.

Action Plan

I’m planning to hit up Penfed for some cheap money with their fantastic auto loan right now. In addition, I have my eye on a few new credit card offers that came in the mail. I’m also still working on finding a way to borrow money from readers directly [8].

So next time you look at a debt, instead of evaluating it on good or bad, try to mentally classify it based on cheap or expensive!