Good Debt versus Bad Debt

worried couple checking bank account online

When talking about debt, you may hear people describe certain types of debt as “good debt”. But what is “good debt”, and what does it look like? And when can “good debt” actually be “bad debt”?

“Good debt” can be described as debt on something that will increase in value or allow you to earn a higher income. Examples of these would be a house, or student loans. Mortgage interest rates are generally lower than interest rates on other types of loans, and it is possible that the value of your home will increase over time. Investing in your education increases your value in the workplace, allowing you to increase your annual income.

So what does “bad debt” look like? Bad debt is consumer debt, particularly credit card debt. Credit cards charge a high interest rate, so it’s important to remember not to make a purchase on your credit card if you do not have the money to pay for it. Are you currently dealing with credit card debt? A consolidation loan is a great way to get debt-free at a lower interest rate. 

So when does “good debt” become bad? While a mortgage is an example of good debt, it is important to take out a mortgage that is within your means. It is better to put off buying a home for a few years to save a larger down payment, or purchase a less expensive home than to over-extend yourself with a mortgage that is larger than you can afford. It is important to be able to continue to save for the future, and put money away in case of an emergency. If your cash flow is low between paying for your mortgage, utilities, food and other necessities, you will be in a vulnerable position in the event of a financial emergency.