Writing Off Bad Debt

Joseph Kenny asked:


In the United States, it is said that there is hardly anybody who does not have any debt. Personal debt is increasing in leaps and bounds. One can easily get a credit card with a tempting discount. Initially credit card issuers used to chose customers who are sound customers capable of repaying their debts. These days the same issuers are looking for customers who will be slow in repayment so that the issuer can charge them heavy interest rate and reap a stupendous amount annually.

But, debt cannot be termed as totally bad . Debt if properly managed and handled can turn good also and can be beneficial in building wealth and security. Experts in these line opines that it all matters what you buy in lieu of the debt taken. When you buy something, the value of which goes down, it is certainly a bad debt. But, if it is reverse, the debt is good. Saying that a good debt produces money and bad debt costs money can easily sum it up. Debt for buying a home that gains equity and increases in value is a good debt. Mortgage provides tax advantage and write-off of interests. It is certainly is a plus in buying a home. It is not only a shelter, the value perpetually increases and gives one a sure way to get his money’s worth.

Many advisers are unanimous in saying that debts that are tax deductible and debts that increases your wealth are good debts. Examples like buying a home or refinancing to get rid of excessive debts are a good use of credit. Similarly, debts for buying high return stocks, bonds or similar investments are worth taking.Let us summarize some of the good debts :

Student Loans:

These type of loan comes on the top of the good debts loan. These are always a wise investment with low interest rate and high rate of return since most college graduates normally earn over a million dollars in their lifetime. Further, education is always priceless, taking a debt for the education is never a mistake. Some people think it is advisable to take government loan first and then low interest private loans , next to take scholarships and grants if available and lastly go for student loans.

Mortgage Loans:

Investment in a home or property is good by taking a debt for doing so. The value of property rises over the years so even with interest on your home loan can still fetch back your money with little extra. But one point to note, one should not be lured to take long term home loans which makes you pay so to say ‘interest only’ payments on your home loan since it merely holding off paying the principal amount of the loan which is the larger chunk off the debt .

Employees Stock Purchase Plans

Some companies offer their employees discounted stock options investment plans. This is also to be termed as a good debt because the company is offering money up front as a loan to the employee to buy stocks at a discount. The employee pay interest interest fee a monthly amount towards the debt while contribute additional amount to help stock fund grow. Also, some may go for traditional investment plan where a set amount is deducted from paycheck and invested for the purchase of stocks which gives them a good return in due course at an opportune time.



Writing off Bad Debt

Martin Lukac asked:


There is hardly an adult in the United States that doesn’t have any debt. The amount of personal debt is increasing. It may be because credit has become so easy to obtain. Everywhere you go, you are offered a credit card and a 10% discount. It can be so tempting.

Credit card issuers used to look for good, solid customers who could repay their debts. Today, however, many card issuers are looking for those who will be slow in repayment and charge a large amount. That way, the issuer makes 18-30% interest a year on the account.

Debt can’t be just lumped into a category as bad. Not all is good, but not all is bad. When used correctly, debt can be beneficial in building wealth and security. CEO David Bach of Finish Rich, Inc. says that it’s what you buy that makes the difference. “When you buy something that goes down in value immediately, that’s bad debt,” he explains.

The difference is that good debt produces money, while bad debt just costs money. If you go into debt buying a home that will gain equity and increase in value, that’s good debt. A mortgage provides you with tax advantages and interest write offs. And you have a place to live while your money is working for you.

Home values over the last thirty years have increased an average of 6.5% a year. When you buy a home, the chances of it appreciating are good. Many advisors highly suggest home ownership as the only way to go.

“The fastest way to wealth in America is buying where you live,” says Bach. “The average renter has a median worth of $4,000, and the average homeowner has a median net worth over $150,000.”

Many advisors say that debts that are tax-deductible and debts that increase wealth are good debts. Buying a home or refinancing to get rid of excessive debts is a good use of your credit. So is generating debt to buy high-return stocks, bonds and other investments.

Bad debt is when you use credit to purchase disposable items or durable goods using high interest credit cards. If you don’t pay the balance in full each month, the debt may become overwhelming.

By using your card instead of cash, you can really lose track of how much you are spending. When the bill comes, you may be surprised. If you don’t pay the total balance, the additional interest charges make the item cost more. If you charge something that is on sale and then aren’t able to pay the balance off, you didn’t get such a great deal. You may pay for the item several times over.

Every month that you only make a partial payment on your credit card results in interest charges. The item you purchased continues to lose value, while the amount you pay continues to increase.

For example, when you purchase clothes, the moment you walk out the door they depreciate by at least 50%. But if you borrowed to pay for them, you will not only pay their original value, but also the added interest rate.

Unsecured debt, such as credit cards, can affect your credit rating. You shouldn’t have more than 20% of your annual income going towards your unsecured debt. It will look bad on your credit report, regardless of you payment history.

According to Michael Hirsch of LowerMyBills your unsecured debt could result in higher interest rates all around. “The recommended debt-to-income ratio is under 15 % to help you qualify for the lowest interest rates possible when extending your credit to buy a home or car,” he says.

If something doesn’t go up in value, and you don’t have the cash to pay for it - then you just can’t afford it.

Many people will open store credit cards just to get the 10-20% discount off of the first purchase. That savings is actually not what it seems. The high interest rate can eat up the entire savings, plus more even.

While most of us have to have automobiles, many people buy more car than they can afford. It is easy to shop for the payment you can afford instead of the overall amount. Many people can afford to buy a car, but not the car that they aspire to. The financing on a car is often quite high considering it begins to lose value the minute it leaves the lot.

For many people, a car loan is the first loan taken out. While it used to make sense to borrow for a car with a 6% and invest your cash in an account that yields 10%, the market has changed over the years.

Most people have an approximately $8,400 in credit card debt. This is accredited to the lack of financial education available. Most people don’t realize how credit cards are affecting the way that they live. Paying more for less doesn’t make financial sense.



Writing Off Bad Debt