What’s the Difference Between “Good” Debt and “Bad” Debt?

Debt is often seen as a bad word, but not all debt is created equal. In fact, some debt could actually be helpful to your financial wellbeing for a variety of reasons, including building your credit history. 

Let’s take a look at the different types of debt and how they can impact your finances.

Good Debt vs. Bad Debt

The first step in managing your debt is understanding the difference between good debt and bad debt. Good debt is defined as debt that helps you make money or grow your wealth. For example, student loan debt can be considered good debt because it’s an investment in your future earning potential. Mortgage debt can also be considered good debt because it allows you to build equity in a home, which can be sold for a profit down the road.

Bad debt, on the other hand, is debt that doesn’t help you make money or grow your wealth. Credit card debt is a prime example of what could be considered bad debt because it generally has high interest rates and doesn’t offer any tax advantages. Personal loans could also be considered bad debt if they’re used to finance consumer purchases that will depreciate over time.

How to Manage Good Debt and Bad Debt

Once you’ve identified the good debt and bad debt in your life, you can start working on a plan to pay it off. If you have good debt, focus on making the minimum payments required to keep your account in good standing. That means you could research mortgage or student loan refinancing to see if you could get a lower interest rate that could help you save money over time.

If you have bad debt, on the other hand, you may want to focus on paying it off as quickly as possible. One way to do this could be by transferring your balance to a 0% APR credit card and then making regular payments until the debt is paid in full. You could also consider consolidating your bad debt into a personal loan with a lower interest rate.

No matter what type of debt you’re dealing with, it’s important to create a budget and stick to it. This will help you free up extra money each month to put towards your debt repayment goals. Additionally, be sure to pay your bills on time and keep your credit utilization low to maintain a good credit score.

The Bottom Line

Going into debt is often a necessary part of achieving personal goals like a college degree or home ownership. It can be a helpful tool, but if not managed properly, can be a debilitating weight on your finances. The key is to understand the difference between good debt and bad debt based on your unique financial situation, and then create a plan to manage your debt. By following these tips, you can create a plan to get your debt under control and continue on the path to financial freedom.