Before we get into the players in the game of debt, you should understand that there is good debt and bad debt. What’s the difference? Simply put, sometimes it’s a good decision to go into debt if that debt will help you gain financially or in some other way. For example, getting a mortgage loan will mean you’ve got a debt to repay; but over time, your home should appreciate in value and, therefore, your debt will help make you money.

Good debt is, in the simplest of terms…

• When the item will outlast the time it takes you to pay it off.
• When the alternative to buying the item would cost you more or put undue hardship on your quality of life.
• When the interest rate is competitive.
• Bad debt is, in the simplest of terms.
• When you’ll still owe money after the item is consumed or worn out.
• When you can live without it by using some self-control or creativity.
• When the interest rate is not competitive.

In analyzing whether a debt is a good one, here is a simple filter to put it through. Will the debt.

1. Give the borrower a legally and morally sound opportunity to get out of the debt or obligation?
2. Be used for something that has a life-expectancy of three years or more instead of something that will be gone, depreciate in value, or be consumed before it is paid for?
3. Be secured by something at least as valuable as the loan itself so that the collateral can be sold to payoff the loan?
4. Be backed by someone or something that has the ability to pay off the loan if the borrower defaults.
5. Have a competitive interest rate? If the loan you’re considering is outside the competitive range, it may signal a problem. If you are a person with a history of credit problems or a low credit score, expect to pay a higher interest rate (up to 5 percent higher) to compensate lenders for taking what they consider to be a higher risk in lending to you.

When you need to borrow money to pay for something, give the loan the security test before you sign the agreement. When you do sign the agreement, make sure you have read, understood, and agreed with the terms and conditions. Don’t take anyone’s word for it until you do.

The Players

To understand debt, you must understand how lending organizations work. You can incur debt from any number of sources. These sources can range from large banks and credit unions to your brother who lent you $100 last payday. The vital part in all these transactions is knowing the terms of the loan-whether it is a mortgage, credit card charge, or whatever form your debt has taken.

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Rule #1: What you borrow, you pay back with interest. Once you’ve signed on the dotted line, you’ve committed yourself to repay that loan, and then some. According to Steve Rhode, creator of myvesta. com’s “The History of Money and Debt,” an entertaining and enlightening online exhibit, the Sumerians were the first recorded culture to develop the concept of interest, and they called it mash, the word for calves. Herds of cows were loaned for, say, a year. When the herd was returned, calves had been born and the size of the herd had increased. These calves were the interest on the loan of the original cows. As Rhodes says, “If cattle were the standard currency of the time, then loans in all comparable commodities would be expected to “give birth” as well. Why shouldn’t the same be true for money?

Rule #2: If you don’t pay, you suffer. There are consequences when you don’t repay a loan-unpleasant ones. Urgent messages arrive in the mail, creditors call you at home, and surprise visits from skilled repossessors come to take back what you bought but didn’t pay for. Avoid this type of grief in your life. Repay what you borrow.

Rule #3: If you pay your loan on time with interest and you are rewarded. In other words, companies in the business of loaning money will think you’re great and will want to loan you even more because they know chances are good you will pay them back.

Rule #4: Your performance in the game of debt earns you a score. Everyone has a credit score. Three primary credit agencies in the United States keep sophisticated records of each individual’s credit history, including yours. The better you pay back a loan (for example, you never miss a loan payment and you always pay your loan on time each month) the better your credit score will become. An excellent credit score simplifies life in a number of ways, from simplified car loans to a better night’s sleep.

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