Debt Decisions

When debt is bad — and when it can be productive.

I’ve heard that when used prudently debt can help financial goals and when used imprudently it can be a source of financial ruin. How can I tell the difference between productive and unproductive debt?

A general rule of thumb is that debt is productive when used to purchase an appreciating or income-producing asset. It is unproductive when used to purchase depreciating assets. Let’s consider a few types of purchases to gauge whether debt is being used productively or unproductively.

Credit Card Debt

Do people use credit cards to purchase assets that appreciate in value or produce income? Hardly. People buy things like groceries, gas and entertainment, all of which are consumables. These depreciate in value — fast. And if you carry a balance from month to month, the interest rates are very high. Carrying a balance on credit cards is always unproductive. It’s a lose-lose proposition. Don’t go there.

Just because it doesn’t make sense to carry a balance on a credit card doesn’t mean they can’t be used at all. It’s certainly convenient to pay for items electronically, and electronic-payment options include debit and credit cards. Debit cards are the safer bet for avoiding credit problems. But if you have good financial discipline, credit cards do offer a few benefits, including greater recourse in the event of a vendor dispute and more attractive customer-incentive programs. But watch out for heavy interest charges.

Credit cards are only productive when they are used to purchase items that are part of your spending plan and are paid in full at the end of each billing cycle.

Home and Car Loans

Is it productive to borrow to purchase your home? In general, yes. Assuming you’ll be in the home for a long period of time, and you don’t buy at the top of a “bubble,” you can expect prices to increase at about the rate of inflation. Even when debt is used to purchase an appreciating asset, prudence is required to keep the debt within reasonable limits.

Some classic and antique cars will increase in value, but the vast majority of automobiles decline in value. In fact, it’s not uncommon for a new car to depreciate 15% once you drive it off the lot! Yet, the vast majority of Americans borrow to purchase their cars.

Borrowing often leads to buying more car than is needed — and more than one can afford. And beware of offers of no down payment and small monthly payments.

Don’t be fooled. With few exceptions, you are better off saving ahead of time and paying cash rather than borrowing.

Asset or Not?

Other situations where debt is often overused: student loans and home-equity loans.

When making a decision to borrow, ask yourself if you are purchasing an appreciating asset and if the amount and terms of the debt are prudent. If not, you may want to rethink the purchase so you don’t become the “slave of the lender” (Proverbs 22:7). God love you!

Phil Lenahan is president of Veritas Financial Ministries ( and author of 7 Steps to Becoming Financially Free: A Catholic Small Group Study (OSV).