Good vs. Bad Debt

When you look at your bills each month, you may feel overwhelmed by the amount of money that you’re spending on debt. Sometimes debt might seem like a trap that you only want to fight your way out of, but not all debt is bad.

When a lender looks at your credit report to see what kinds of accounts you have, they will look at some debts more favorably than others. If you’re focusing on getting out of debt, you need to know which debts are considered bad and which are considered good.

Some Debt is Good

Some kinds of debt are actually investments. It might sound preposterous, but it’s true. If you used debt to finance something whose value will appreciate or contribute to your financial health, then you’ve incurred good debt.

What are some examples of good debt? A student loan borrowed to finance education. It’s been proven that people with college degrees make more money over their lifetimes, so a student loan is an investment in yourself. A mortgage loan used to purchase a home is good debt since homes typically appreciate in value.

And Some Debt Is Bad

Now you know there’s good debt. You can incur bad debt too. Anytime you accumulate debt to pay for something that can be consumed, the debt it bad. Once you’ve consumed the item, there’s no value in it, yet you’re left with debt to pay for something you no longer have. Bad debt is financially unhealthy.

Because of the things that credit cards are used to purchase, credit card debt is often bad debt. When you use credit cards to purchase everyday items that you will use or that will depreciate in value soon after they’re purchased, you have accumulated bad debt.

Auto loans, by definition, are bad debt, because the car will depreciate in value as soon as you drive it off the lot. Even though transportation might be a necessity, the auto loan is still bad debt.

To maintain your financial health, you must make sure that you don’t accumulate too much debt, whether it’s good debt or bad debt. It is possible to become overloaded with debt, even good debt, to the point that you struggle to make ends meet.