Characteristics of Debt

The characteristics of debt are largely based on your financial situation and your financial goals. Debt is often characterized as a bad thing in an economic downturn when unemployment rates and home foreclosures rise. Yet there are times when taking on debt can work in a person's favor. In any case, using debt to your advantage requires examining your financial situation and having specific reasons for accumulating debt.

Good and Bad Debt

The difficulties in characterizing debt become evident when comparing advice from people in the financial industry. In a Bankrate.com article, a chief executive officer asserts that good debt includes business and mortgage loans because they can create value as the worth of a business or home rises. That's in contrast to an auto loan in which the purchased vehicle quickly loses value. A finance professor also recommends assuming debts that are tax-deductible, such as the tax-deductible interest of a mortgage. Yet an article on the U.S. News and World Report website advises forgetting about trying to define good debt and bad debt. For example, credit-card debt is often characterized as bad debt because it usually comes with high interest rates. Yet credit cards also can help you get ahead when they're used for important business or school expenses, but the cards still should be paid off as soon as possible.

Low-Interest Debt

Determining whether debt should be paid off also can be affected by a person's financial situation and goals. For instance, you might choose to keep low-interest debt instead of paying it off if you're planning to buy a house. This would allow you to put more cash into your savings account for a down payment on your home instead of using your cash reserves to pay off debts with low interest rates. Some low-interest debts can be an investment in your future, which will ultimately bolster your finances. That includes a low-interest student loan that helps you get training for a job with higher pay.

Debt Versus Income

Your creditworthiness determined by mortgage bankers and others can be impacted by how much debt you have. Generally, your total monthly debt payments shouldn't exceed your monthly income before tax deductions. Yet not taking on any debt also can hamper your financial situation if being debt-free means you won't be able to set aside cash for emergencies. In such cases, you might consider good debt as any necessary expense you can't afford to pay for without wiping out your cash reserves.