Good Debt vs Bad Debt

You’ve probably heard people say things like “a mortgage is good debt” or “credit card debt is bad.” There’s truth to that idea, but it’s not always black and white. Understanding the difference between debt that can work for you and debt that works against you helps you make better borrowing decisions — and feel less stressed about the debt you already have.

What Is “Good” Debt?

Good debt is borrowing that helps you build wealth, increase your earning potential, or acquire an asset that grows in value over time. It’s an investment in your future that’s expected to pay off down the road.

Common examples of good debt include:

• Mortgages. You’re borrowing to buy a home, which typically appreciates in value. Plus, mortgage interest rates are usually much lower than other types of debt, and the interest may be tax-deductible.
• Student loans. Education can increase your earning power over your lifetime. Federal student loans also come with flexible repayment options and potential forgiveness programs.
• Business loans. Borrowing to start or grow a business can generate income that far exceeds the cost of the loan.

What these have in common is that they tend to come with lower interest rates and the potential for a return on your investment.

What Is “Bad” Debt?

Bad debt is borrowing for things that lose value quickly or don’t generate any financial return — especially when the interest rates are high.

Common examples include:

• Credit card debt. With average APRs above 20%, carrying a balance on your credit cards is one of the most expensive ways to borrow. And most credit card purchases — clothes, dining out, electronics — lose value immediately.
• Payday loans. These short-term loans can carry APRs of 400% or more. They’re designed to trap you in a cycle of reborrowing.
• Car loans on depreciating vehicles. While sometimes necessary, borrowing to buy a car that loses 20% of its value in the first year can put you “underwater” — meaning you owe more than the car is worth.
• Buy Now, Pay Later debt. While it feels harmless, BNPL can encourage overspending on things you don’t need, and missed payments can come with steep consequences.

The pattern here is high interest rates, depreciating purchases, and no long-term financial benefit.

When Good Debt Turns Bad

Here’s where it gets nuanced. Even “good” debt can become a problem under certain circumstances:

• Borrowing too much for a home. A mortgage is good debt in theory, but if your monthly payment eats up 50% of your income, it becomes a burden. Being “house poor” limits your ability to save, invest, or handle emergencies.
• Student loans for a low-earning degree. Taking on $150,000 in student loans for a career that pays $35,000 a year creates a debt-to-income imbalance that can take decades to recover from.
• Refinancing into worse terms. Consolidating debt can be smart, but if you extend your repayment timeline dramatically, you might pay more in total interest even with a lower monthly payment.
• Using home equity for non-essentials. A HELOC is technically secured by an appreciating asset, but using it to fund vacations or luxury purchases turns good debt into bad debt fast.

The key question is: will this debt improve my financial position over time? If the answer is no, it’s probably not worth it — regardless of how the debt is categorized.

The Gray Areas

Some debt doesn’t fit neatly into either category:

• Auto loans can be necessary if you need a car to get to work. Borrowing for a reliable, affordable vehicle is a practical choice — just avoid overextending on a car you can’t comfortably afford.
• Medical debt isn’t a choice at all. Nobody plans to get sick or injured. While it’s technically “unproductive” debt, it’s not the same as overspending on a credit card.
• Personal loans for debt consolidation can be a smart move if they lower your interest rate and help you pay off debt faster. But they’re only helpful if you don’t run up new balances on the cards you just paid off.

How to Make Better Borrowing Decisions

Before taking on any debt, ask yourself these questions:

1. Will this increase my income or net worth? If yes, it’s more likely to be productive debt.
2. What’s the interest rate? Lower rates mean borrowing costs less. Anything above 10% should be approached cautiously.
3. Can I comfortably afford the payments? If the monthly payment strains your budget, the debt is too much — even if it’s technically “good.”
4. Is there a less expensive alternative? Sometimes saving up or finding a different path avoids the need to borrow at all.

Bottom Line

Good debt helps you build a stronger financial future, while bad debt costs you money on things that don’t grow in value. But even good debt can become a problem if you borrow too much or can’t keep up with payments. The best approach is to borrow thoughtfully, keep interest rates low, and make sure every dollar of debt is working toward something meaningful.