Five Kinds of Debt

There are five primary kinds of debt, each with its own characteristics and dangers:

  1. Home Mortgage
  2. Auto
  3. Education
  4. Business
  5. Consumer

We will focus on Consumer debt (primarily, credit cards) in succeeding topics. Each of the other four kinds of debt has valid uses but also carries its own dangers.

Home Mortgage

Most individuals, couples, or families who buy a home will incur mortgage debt on their house.  As a house is the single largest expense most people will have, it usually is not possible to purchase one without any debt.  Additionally, there are some tax benefits to owning a home vs. renting an apartment; however, there are also many hidden costs (such as maintenance, upkeep, etc.).

Generally, property values tend to increase with time, so that a house is typically an appreciating asset (if well-maintained).  There are exceptions based on changes in neighborhoods and overall economy.  In the early 2000’s, a downturn in the economy left many borrowers “upside down” on their houses, meaning that they owed more on the house than it was worth.  Many of these borrowers had overextended themselves in the original purchase due to lax lending policies on the part of banks and other lending institutions.  As the economy worsened, people lost their jobs and could no longer make their house payments, and many houses were foreclosed on by the lenders.

There are many factors that go into determining which house to buy, but from the standpoint of being a Cautious Debtor, here are a couple that stand out:

  1. Don’t buy all the house you can afford.  Remember that you’ll have additional costs to furnish and maintain the home.  Keep in mind also that property taxes tend to increase yearly.
  2. Look for an opportunity to take on a 15-year mortgage, rather than a 30-year one.  This will get you out of debt faster.
  3. Maximize your down payment.  This will often help you get a better interest rate on the mortgage, and again will reduce your overall debt load.


Most automobiles decrease in value over time and with usage; as a result, unlike a house, a car should not be considered an investment.  The Cautious Debtor will approach automobile loans with care and restraint.

“The cheapest car to drive is the one you already own.” — Dick Towner


The cost of college today is prohibitive for most students without incurring significant debt.  However, the choice of college (in-state vs. out-of-state, community college vs. four-year university, private vs. public, etc.) will have a major effect on the debt load required.  Two key realities to keep in mind concerning college debt are:

  1. Students entering the job market out of college will be at the lowest income points of their entire careers.  This means that they’ll be paying off school loans at the same time that their income is lowest.
  2. Parents of students entering college are typically working to save for retirement.  We saw earlier that a given dollar can be spent only once; if that dollar goes to college education, it’s not going to retirement.


Going into business will usually require a certain amount of debt.  With sufficient planning and a certain amount of “good luck” along the way, this debt will turn out to be a great investment.  However, business debt is also a major contributing factor to bankruptcy and can have long-lasting financial impact.  See below for the Good Sense position paper on bankruptcy.