Good Debt vs. Bad Debt: Know the Difference

Good debt can help you achieve goals, while bad debt is expensive and can derail them.
Sean PylesAug 5, 2021

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Before you take on any debt, consider whether a car loan or new credit card will help meet your financial goals — or make them more difficult to accomplish. The you take on, along with its quantity and cost, can mean the difference between good debt and bad debt.

A credit card, for example, can be a means to financing large expenses and earning reward points. But if not managed carefully, credit card debt with high interest can spiral out of control.

Here are general guidelines on good debt and bad debt, one and what to do if you’re facing too much debt.

Low-interest debt that helps you increase your income or net worth are examples of good debt. But too much of any kind of debt — no matter the opportunity it might create — can turn it into bad debt.

Medical debt, for example, doesn’t neatly fall into the “good” or “bad” debt category. It’s an expense that’s largely uncontrollable and often doesn’t have an interest rate. You have .

Typically regarded as an investment in your future, student loans tend to have lower interest rates, especially if they’re federal student loans.

Likely the biggest financial decision you’ll make, a mortgage is the path to homeownership.

For many, a car is essential for everyday life.

Expensive debts that drag down your financial situation are considered bad debt. Examples include debts with high or variable interest rates, especially when used for discretionary expenses or things that lose value.

Sometimes, bad debts are just good debts gone awry. Credit card debt is an example of this: If you have a high-interest credit card and pay off your balance each month, no problem. But if high-interest credit card debt builds up, you could be in trouble.

High interest rates, such as those greater than 20%, can make your debts more expensive.

Taking on debt for expenses like a vacation or new clothes can be an expensive habit.

 are a bad debt that can turn toxic: They often come with interest rates as high as 300% that can make them immediately unaffordable. These are short-term, small-amount loans meant to be repaid with your next paycheck.

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