When you hear the word “debt,” do you automatically think it’s something negative?
For most people, the answer would be, “yes!” We were likely always taught that being in debt is something to avoid. And while some debt is more harmful to your future than others, having debt isn’t always a bad thing. Owing money and paying your bills on time help you build good credit.
But how do you know the difference between good and bad debt?
That’s a great question. Let’s separate the two.
WHAT IS BAD DEBT?
When you are trying to identify the status of your debt, you should always ask yourself this one simple question: “Is this debt costing me more than it’s helping me?”
In general, bad debt is anything that loses its value, carries a high interest, or doesn’t help to improve your financial situation.
High-interest credit cards are the biggest offenders of “bad debt.” Credit cards with large balances allow the interest to grow quickly, making it harder to pay down your debt.
Many times, when you’re using a credit card, you are buying items you can’t afford that hold no value and give you nothing lasting in return. Buying things that stretch your budget beyond what you can pay off never seems to go away. It continues to linger, causing the interest and your debt to grow larger and larger.
If your debt carries high interest, offers no long-term benefits or returns, burdens your monthly budget, or continues to grow rather than shrink, it is considered “bad debt” and warrants a sustainable plan to eliminate it.
But remember, not all debt is bad.
WHAT IS GOOD DEBT?
“Good debt” helps you build something lasting or helps to improve your finances in the future.
A home mortgage that comes with a monthly payment you can afford is a great example of “good debt.” Owning a home builds equity over time, meaning part of everything you pay eventually becomes yours. It’s more than simply paying a bill; it’s investing in something that has lasting value.
Student loans are also considered a source of “good debt” as the cost of an education leads to a means of income. If your debt increases your earning potential, it is seen as a positive for your future rather than a hindrance.
Auto loans that don’t come with a high interest rate and fall within a monthly payment you can afford also help to improve your day-to-day life. You likely need a car to get to work or school, or to support your family. As long as the payment fits comfortably within your budget, this type of debt is considered to support your daily life and your potential to earn income.
If it helps you earn more or build value, has a reasonable interest rate, and payments that fit your budget, it is debt that can be considered intentional rather than impulsive.
Even though healthy debt exists, you should always aim to have less debt overall. Paying it off should always be the end you have in mind.
Saving for the future, living within your means, and being intentional with your spending will put you in a strong position and set you up for a life free of financial stress and struggles.
At the end of the day, no one wants you to label every single dollar as “good” or “bad.” Instead, the goal is to become more thoughtful with your spending. Debt can either build your future or slowly bury you in a burden. When you are intentional about how you spend your money, you create a rhythm of financial peace rather than pressure. And that should be the foundation you’re focused on building.