Good Debt vs. Bad Debt

good debt vs. bad debt

It’s nearly impossible to live life completely debt free. Only a small amount of people can actually pay cash for all necessities, and the rest of us are forced to take out loans or use credit cards. Debt is a complex concept however, and although the average amount of debt in each U.S. household is less than ideal, not all debt is bad and avoiding it all together can actually harm your financial health. The challenge is understanding good debt verses bad debt, and learn how to judge what makes sense for you and managing your money.

Good Debt

Essentially, “good” debt is an investment that creates value or generates long-term income and increases your net worth. Debts that produce more wealth in the long run and can be tax-deductible are often considered a good move for your financial situation. Examples of taking on good debt include things like a mortgage, school loans, real estate loans and business loans. If you are wondering if a purchase is a good idea that will work in a positive manner for you, ask yourself if you need it but can’t afford to pay up front without depleting your emergency fund. Only take out loans for which you can afford to make the monthly payments on time.

Acquiring some “good debt” and being diligent about paying off the loan amounts in full each month can allow you to increase your credit score and improve your credit history. Acquiring some good debt and bettering your credit can eventually help you get better loan amounts as well as prove you are financially savvy to the credit bureaus.

Bad Debt

While even some “good” debt ideas can have a downside, there are some debts that are downright bad. Bad debt creates an unhealthy financial situation and are usually connected to purchasing items that are disposable, depreciate in value or do not generate long-term income. Bad debt is also debt that carries high interest rates like those on credit cards. Generally, if you purchase an item that you don’t absolutely need that you can’t afford to pay for in cash, you are incurring bad debt.

Never accumulate debt to purchase everyday items like clothes, food or even a vacation. Although these things might make you feel better immediately, it will end up costing you more money in the long run and can ruin your credit and financial situation. Taking on debt should not be taken lightly so always make sure that there is no other way to finance a necessary purchase before taking out loans to pay for them.

Overall, be careful for the kind of items you take on debt for and always be careful to not take on too much debt. There are plenty of arguments to be made for the idea that no debt is god debt, but sometimes we have no choice. If you are weighed down in overwhelming debt, it doesn’t really matter if it is considered good or bad, it will still wreak havoc on your financial health.

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