Carrie Schwab Pomerantz

Personal debt has been grabbing the headlines - and there is no shortage of cautionary tales. I must admit, in general, I am not a fan of debt. Interest payments are expensive, along with late fees and penalties if you don't pay on time. Easy access to credit prompts many people to spend beyond their means. And every dollar you spend on interest is another dollar you can't save and invest.

But some debt is inevitable and even useful when used judiciously. Most people simply could never buy substantial assets like houses and cars without taking on debt (just as most businesses can't grow without access to credit). The trick is to learn the difference between good debt and bad debt - borrowing wisely - and to manage your debt prudently.


Good debt means inexpensive debt, and inexpensive debt is typically backed by collateral: A home or a second home, for example, along with a home equity line of credit (HELOC). The fact that most interest payments for home-related loans are tax-deductible only adds to their attractiveness. You can deduct the interest on a home or second home loan as large as $1 million (combined). For a second mortgage or HELOC, you can deduct interest up to $100,000. As always, tax issues can be complicated by your personal situation, so consult your tax adviser if you're unsure about tax deductibility.

The caution, as we've seen played out in virtually every city across the country, is not to take on more mortgage debt that you can comfortably repay, and to fully understand the terms of your loan before you sign on the dotted line.


Consumer credit, particularly credit cards, is the poster child for bad debt; it's often extremely expensive and, for some, extremely addictive. As I write this article, the national average credit card interest rate, according to, is just under 14 percent - that's almost three times the average home mortgage rate and just about twice the average HELOC rate. And individual store credit cards are typically higher still. I just took a look at one of my store cards, which charges a whopping 21 percent on balances. I never keep a balance on it.

This does not mean you should avoid using credit cards. They're essential for many purchases and easier to use than checks. Having and using credit wisely (paying promptly) will help build your credit rating. Plus, many cards now offer pretty valuable rewards: points, airline miles, buyer protection, or even cash back. But don't maintain a balance unless you positively must.

Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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