Good Debt vs. Bad Debt

During the recent holiday season, lots of people shopped 'til they dropped. But how were holiday goodies paid for? People have lots of debt, especially from credit cards, but is there a kind of debt

Monday, January 8th 2001, 12:00 am

By: News On 6

During the recent holiday season, lots of people shopped 'til they dropped. But how were holiday goodies paid for? People have lots of debt, especially from credit cards, but is there a kind of debt that is good to have?

"The difference between good debt and bad debt is good debt is first of all debt that you can afford," says James Cotto of Merrill Lynch. "Secondly, it is debt where the interest is able to be deducted on your taxes. Bad debt is debt that is not able to be deducted on your taxes."

There are not many ways to deduct debt off your taxes anymore, certainly not with a car loan or credit cards, but to convert so-called bad debt to good debt, you have to look no further than home sweet home.

"If you are a person who has bad debt, and are a homeowner you should look to either increasing your mortgage or obtaining a home equity loan, because the interest on these two vehicles is tax deductible," says Cotto.

Everyone has debt and how we manage that debt can save money. Experts say that having debt that provides no tax incentives is considered bad debt and should be consolidated into loans that can be deducted come tax time, creating a good debt situation.