If you’ve gone through the pain of paying off a big credit card debt, you’ll know it can leave you reluctant to ever go into debt again.

But often borrowing can help us build funds for the future. So what does it take to move through that resistance and discover that debt doesn’t have to be a dirty word? For starters, it helps to recognise that there are different types of debt. Some drags you down, while others can give you lift-off. Financial planners like to label the two: good debt and bad debt.

Good debt involves borrowing to purchase an asset that should appreciate in value or provide an income stream. It might be a home; an investment property; shares; managed funds; a business. It’s generally secured against the asset so if you can’t meet the interest payments there is something to sell that will (hopefully) cover the outstanding debt. Apart from a mortgage, the interest cost is generally tax deductible.Scott Heathwood, executive chairman of Wealthy and Wise Lifestyle Planning, says there can be a great upside to borrowing to invest, particularly in assets such as property, that are not subject to constant revaluations.

“Good debt can super-charge the return on your equity,” he says. “It can double or triple the return.”

“If someone has got $200,000 in a super fund if they turned that into a $600,000 property asset and borrowed $400,000 through the bank and say they got a 6 or 7 per cent return on that then they’d be getting 6 per cent on $600,000 as opposed to 6 per cent on $200,000.

“Assuming the tenant is paying the rent and the rent is paying the interest cost … then you’ve got 6 per cent on the bank’s money.

In effect, you’re getting $36,000 on $200,000 as opposed to $12,000 so it’s three times the return.”

Bad debt, on the other hand, is associated with spending on things that will have little value in the future. Think holidays; clothes, eating out, groceries.

It might also include an ‘asset’ that begins depreciating the minute you drive it out of the showroom or furniture that goes onto the nature strip before you’ve paid off your no-interest-for-24-months loan. It’s unsecured and is not tax deductible.

“Credit card debt is the bad one because it’s unsecured, it’s expensive and it’s at a very high rate,” says Heathwood.

So far, so straightforward but debt doesn’t always slot neatly into textbook categories. You can still find your so-called ‘good debt’ growing horns and sporting a pitchfork if you lose your job, experience a drop in income; a relationship breakdown or an accident.

A Jekyll to Hyde switch can also be caused by a dramatic change in the financial weather.

Crisis strikes

Caroline and Craig Makepeace owned an Australian investment property debt-free when they decided to use their equity to fund some wealth-building manoeuvres.

“We used the equity from that to invest in property in America and we also used some of the equity to invest in shares and a couple of other things,” explains Caroline.

“We were looking to create our own business so we got sucked into that internet world of how to make money overnight and we chased those kinds of schemes all over the place.”

What happened next: the global financial crisis triggered a financial crisis for the couple. In the space of two years their good debt turned horribly bad.

“The investment property in the United States just collapsed so that went really badly and the shares went really badly so everything kind of fell apart for us.”

The couple ended up walking away from the American property and selling their Australian investment property. But the two-year struggle to try and hold it all together left them with $30,000 of credit card debt.

“In the end because our situation was so bad we were using the credit card to invest in different things but also to cover our living expenses,” she says.

As Caroline’s details they spent the next three years doing everything they could to pay off the debt including moving in with Craig’s family and using bonuses to pay off large chunks of debt.

“Even when everything was falling apart we knew the ramifications of bad debt,” says 38-year-old Caroline.

“We’d always been very good with money up until that point so we knew that it was something that we had to get on top of.”

Once the debt was repaid they started a travel business and it now funds their travels around Australia with their two children. While they plan to return to investing in property, their financial confidence has taken a body blow.

“I’m not confident enough at the moment to get back in,” says Caroline. “It really shook me. It really shook my confidence a lot and I guess I’m kind of frightened of that responsibility.”

As their story shows adding debt firepower to your returns is something that needs to be handled with care.

How secure are you?

Heathwood says one of the first things that should be considered is security of income.

“Are you secure in your job? Do you have mobility? One of the things that concerns me sometimes with people is they may have a good job but if they lose it they are going to be unemployable.”

Relationship stability can also be key. The quality of the asset is crucial.

“Don’t buy exotic investments. Don’t go into structured products,” says Heathwood.

“If you’re just an average person stick to plain vanilla stuff – average sustained growth over time is good.”

He advises people to buy quality property assets in growth corridors in capital cities and to look for areas earmarked for infrastructure developments or urban renewal.

“If you’re going to invest somewhere and the government is spending money on a hospital or a railway system – get in early – not after the event. If you get in during the planning stages you’ll make money.”

Similarly, he advises sticking with quality stocks, adding: “We wouldn’t gear anyone more than 50-50 because the market has got to drop 30-35 per cent or more before you’re in margin call.”

Borrowing capacity and your investment time horizon will impact whether borrowing to invest is a good idea. It’s not for someone on the verge of retirement. You also have to be able to withstand interest rate rises, ideally an extra 3 per cent in rates.

Wally David, a Melbourne financial planner and the author of, thinks we have become too comfortable with carrying large amounts of debt and he advises clients to get rid of most – if not all – of their non-deductible home and car loans before borrowing to build wealth.

From a tax point of view it’s going to make most sense for someone on a reasonable income.

“If there will be a shortfall in terms of what you are paying in interest vs what you are earning in income the tax benefit is obviously more skewed if you are on a higher tax rate,” he says.

“There has also got to be money left over in your week-to-week expenditure to allow you room to service that extra commitment which if you’ve previously been making repayments on your home loan now you can redirect it elsewhere.” Turning debt to your advantage

Using a credit card doesn’t necessarily mean you are doomed to a debt disaster.

Plenty of people turn a rewards credit card to their advantage. According to’s Winter 2014 Insights Report, one in five cardholders chose a credit card for the rewards program, compared with only 6 per cent two years ago.

There are now 49 cards offering bonus points on sign-up, up from 21 in 2013.

Brisbane resident and author of The Travel Tart blog Anthony Bianco makes the most of his credit card linked to an airline rewards program. To rack up points he puts everything on his card including concert and sporting tickets on behalf of groups of friends.

“I’ve also volunteered to pay for work functions which are a very quick way to rack up points,” he says. He only uses the points for international flights as the points required per kilometre are less than those for domestic flights. His point-hoarding strategy has already translated into several overseas trips, including one round-the-world trip involving five stops.

Michelle Hutchison, money expert with, says rewards cards are not for everyone. To get the benefit out of one you have to spend $12,000 to $14,000 a year and pay it off in full each month.

That’s because the average purchase rate for a rewards card is 19.66 per cent and the average annual fee $180, compared with 15.9 per cent and $65.34 for a non- rewards card.

Those with the highest sign-up bonuses – American Express Platinum offers 80,000 points and the Citi Select Credit Card 60,000 rewards points – have annual fees of $1200 and $700 respectively.

A lesser known feature of the Amex card is that you can apply to have its annual fee of $395 waived. That card comes with a complementary economy return flight to one of seven international destinations and 29 domestic destinations or an overnight hotel stay.

Check out the add-on costs too. American Express card-holders pay higher surcharges than Mastercard and Visa credit card-holders. Hutchison says there can be conditions imposed on the sign-up bonuses.

For instance, “ANZ’s card has a bonus 50,000 points but you need to spend $1500 on eligible purchases within three months.”

Could people sign up, grab the bonus points and then switch to another card? Yes, says Hutchison, but be aware of the impact on your credit file.

Plus, she adds: “Some credit card providers will look at how many times you’ve switched in the past, say 12 months, two years, and if you’ve switched a certain number of times within that period you may be rejected.” ACTION PLAN

To make the most of “good debt”:

  • Ensure you have job and relationship stability
  • Check you can withstand interest rate rises
  • Stick to quality assets
  • Check you have the excess cash to service any shortfall between the income from the asset and the borrowing costs
  • Cover yourself against any loss in income through an accident or job loss

Posted by Money Manager – Fairfax Digital on 24th September, 2014