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Wyandotte, Mich. — June 12, 2024 —The proverbial advice in William Shakespeare’s Hamlet—“Neither a borrower, nor a lender be”—is usually not a practical option for most people in the 21st century, according to Carma Peters, president and CEO of Michigan Legacy Credit Union. In her credit union role, Peters fields myriad questions from concerned borrowers wondering about the impact of accruing debt on their long-term financial health.

“I know people like to think of debt in simple good versus bad terms and want easy answers, but debt in-and-of-itself is neither good or bad; it just depends on each individual’s circumstances,” Peters said. “And in some cases, it can be both.”

Peters breaks down some misconceptions about good debt versus bad debt – and what is actually important to focus on – using these common borrowing scenarios:

Mortgages: A mortgage is usually considered good debt, unless the loan is larger than one can afford or is in a real estate market where the homeowner is holding a mortgage balance greater than the home is worth. However, even this can be a short-term problem. If you look back to 2008, many homes that were underwater in value have increased in value today. Peters also notes that the debt ratio – which is calculated by dividing one’s total debts by total assets – is not calculated on credit reports or in your credit score, so the most important thing to remember is that mortgage payments need to be made on time, every time.

Car Loans: Peters reiterated the number-one priority in making loan payments, including car loans, is paying on time, because similar to a mortgage, the debt ratio of a car loan is not calculated on credit reports or in your credit score. Car loans can be a solid way to establish credit, get a job and become upwardly mobile, so in that way, a car loan can be good debt. But if the interest rate on your loan is higher than necessary or you’ve overextended on your purchase–the debt can quickly turn harmful.

Education Loans:  Whether this debt is good or bad depends on factors such as the size of the loan, one’s ability to pay it back based on the career pursued, and the interest rate on the loan. However, Peters cautioned that many student loan borrowers don’t realize creditors count future payments into their debt ratio, so it will have an impact during the life of any new loan they’re applying for down the road.

Peters says one of the biggest mistakes students make is not keeping their address current with their lender. Once students graduate, they typically move, and if they forget to update their address, they may miss student loan repayment information. If the first payment is late, it can affect interest rates on new autos, credit cards, homes.

Personal Loans: Peters said consumers sometimes associate personal loans with bad debt—thinking that they’re only being used to finance a wedding or vacation beyond one’s means, but in reality, that isn’t the case. Bad debt comes into play more if the loan has a high interest rate, or if it’s on revolving credit and your balance is greater than 50% of your limit—as this will significantly affect your credit score.

Credit Cards: With credit card interest rates hitting record highs, it’s not a surprise that consumers always connect this type of debt with bad debt. However, Peters points out that credit card debt can be good when you have high availability—accumulated a lot of available credit (but still have charged less than 50% of your credit limit)— and have had the account opened for many years. Your available credit is the highest factor in your credit score.

“If you do run into financial difficulty, do not avoid your creditor – contact them immediately,” Peters advises. “There may be many more options available if you reach out, and avoiding the inevitable only increases stress and ultimately reduces options for assistance.”

About Michigan Legacy Credit Union
Michigan Legacy Credit Union (MLCU) is a member-owned, not-for-profit financial cooperative serving members who live, work, worship, attend school, or own a business in the state of Michigan. Michigan Legacy Credit Union is committed to providing quality financial services at a competitive price, delivered professionally and efficiently while keeping member/owners and their needs first. For additional information on MLCU, visit: