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Is there a difference between good and bad debt? Debt is debt isn�t it? Some might say that any debt is bad debt, especially our grandparents and great grandparents who preferred to save up for what they wanted rather than borrow. Their thinking being if you can�t afford it, don�t buy it.�

How times have changed. We are a nation that lives with and on debt. We especially like our credit cards and store cards because it means we don�t have to save for what we want. We can buy it now and worry about paying for it later. The credit card companies love that and so do the retailers who sell more products.�

OK, perhaps I�m being a bit hard here. After all, credit cards do offer convenience and an element of safety (for example, there�s no need to carry around wads of cash) but with the average Australian carrying over $3,000 of credit card debt at interest rates of 15% to 20%+, it raises the need for more of us to be smart with our money.�

So let�s explore what being smart means. Let�s look at the difference between good debt and bad debt.�

Good debt is debt that produces wealth and cash flow. For example, a home loan is good debt because over time your home should generate a good tax free capital gain. Plus, we�ve got to live somewhere and it is often more cost effective to buy rather than rent over the long term.�

Really good debt would include borrowing to buy assets like an investment property or shares – not only could you generate a capital gain on sale, but you�ll also get an income stream (rent or dividends) and a tax deduction for interest payments.�

Another example of good debt would be debt consolidation, say into your home loan where you could save a significant amount on interest costs, especially if you consolidated higher cost unsecured debt. But remember, if you continue to borrow after consolidation you may end up considerably worse off with higher debt and less equity in your home.�

Bad debt typically involves borrowing to pay for your lifestyle. It often involves buying things you don�t really need that will decrease in value as soon as you walk out of the shop, using expensive store cards or credit cards.�

This is the easiest way to over extend yourself as you can quickly lose track of your purchases. It can include items like an expensive holiday, clothes, and electronics. It�s OK to treat ourselves once in a while but when this becomes the norm, and when bad debt is not paid off in full, financial problems may start to surface.�

More often that not, it is bad debt that gets people into financial trouble. Defaults on your credit cards and other forms of unsecured borrowing are recorded by credit reference agencies like Veda Advantage and Dun and Bradstreet. Once your credit rating is affected in a negative way it can hurt your chances of qualifying for cheaper finance or finance at all.�

To work out if your debt is good or bad you need to ask yourself whether the asset you�re going to buy will increase in value or provide cash flow advantages. If the answer is no, then you should think very carefully about borrowing to buy. If you do borrow, then look to pay the debt off in full very quickly, if not immediately on receipt of your statement.�

Saving before you buy might not be the way things are done these days but it may be the best way to avoid consequences of bad debt.

Pete Boehm is co-founder of Our Home Sweet Home – a home buyer and property investor resource where you�ll find home loans, mortgage calculators, guides and more. If you�re looking to buy your first home sign up to Our Home Sweet Home�s free seven week e-mail course 7 Steps to Home Ownership. Follow Pete on Twitter or join the conversation at the Our Home Sweet Home Blog. You can also ask Pete a question.