When you hear the word “debt,” your first thought might be stress or financial strain. But not all debt is bad. Some kinds of debt can help you build a better financial future. Others can hold you back and cost you more than they’re worth. Understanding the difference between good debt and bad debt is a key part of managing your money wisely.
In this guide, we’ll break down what separates helpful debt from harmful debt, give real-life examples of both, and help you decide when borrowing might make sense.
Good debt is money you borrow that helps you increase your long-term financial health. It’s the kind of debt that creates value, builds wealth, or improves your earning power over time.
Some of the most common examples of good debt include:
Good debt tends to have lower interest rates, longer repayment terms, and a clear path to helping you improve your financial situation.
Bad debt is money borrowed for things that lose value quickly or don’t help improve your financial future. It often comes with high interest rates, short repayment terms, and no long-term benefit.
Examples of bad debt include:
Bad debt can quickly lead to financial stress, especially when payments become overwhelming. It doesn’t support your future income or net worth, and in many cases, it leads to ongoing financial struggles.
When deciding whether to take on new debt, ask yourself a few key questions:
If the debt helps you move forward financially, it may be worth considering. If it only provides short-term satisfaction and long-term payments, it’s probably best to avoid.
Let’s look at a few more examples of good debt and how they can help:
These types of loans all have the potential to increase your income, protect your assets, or support long-term goals.
Some loans should be avoided whenever possible. Here are a few of the worst offenders:
For more on harmful loans to avoid, check out 6 types of the worst loans you should never get.
It’s not always easy to know whether debt is good or bad. Many types of borrowing fall somewhere in between.
For example, using a credit card to pay for unexpected expenses may be necessary in a pinch, but if it leads to interest charges and late fees, it can become bad debt quickly.
The key is not just what you borrow for, but how you manage the repayment. Good debt becomes bad debt when payments are missed or balances are carried too long. Responsible borrowing, on-time payments, and a plan to repay can keep you on the right track.
One of the most important things to compare when taking on debt is the interest rate. A low interest rate means you’ll pay less over time, while a high interest rate can make even a small loan very expensive.
The annual percentage rate (APR) includes both the interest rate and any fees, giving you a clearer picture of the real costs.
You can use resources like HUD's guide to comparing mortgages to compare loans and better understand interest rates.
Credit cards can be helpful tools when used carefully, but they often lead to bad debt when balances grow and interest piles up.
If you’re struggling with revolving credit card balances, a debt management program may help you regain control.
A line of credit is a flexible borrowing option that gives you access to funds as needed, rather than all at once like a traditional loan. It’s often used for emergency expenses, home repairs, or business needs.
Compare this to fixed loans, which offer predictable payments but less flexibility. Both can be good or bad depending on how they’re used. Overusing a line of credit or failing to repay can quickly lead to trouble.
Managing your cash flow—the money coming in and going out—is key to using debt wisely. If debt payments take up too much of your income, it’s harder to stay ahead financially.
When debt drains your resources instead of supporting them, it’s a sign that borrowing has become a burden.
Both a home equity loan and a home equity line of credit (HELOC) let you borrow against the value of your home. But they work differently:
These tools can be used for big expenses like home improvements or education, but they also put your home at risk if you can’t repay. Use them wisely and only for high-value needs.
Many people ask: Debt... what’s the difference between good and bad?
The short answer is: how it helps or hurts your future.
The same kind of loan can even be good or bad depending on how it’s used. Buying a dependable used car to commute to work may be smart; leasing a luxury car you can’t afford is not.
Some debts are almost always considered bad debt, especially when they come with high costs and no long-term benefit. These include:
These types of debt often trap borrowers in cycles of repayment that damage financial health. Learn more in our guide to the worst loans you should never get.
Even if you started with good debt, it can become a problem if your total debt load grows too large. Overwhelming debt can affect your ability to:
If your monthly debt payments take up too much of your income, you may need help. Nonprofit credit counseling can help you review your options and reduce your burden.
Debt can be used as a tool to build wealth if it’s part of a smart, long-term plan. This might include:
But not all debt creates value. If you’re borrowing for wants instead of needs, or taking on payments you can’t afford, it’s not helping your financial future.
Using debt wisely can help you build good credit, which makes future borrowing more affordable. Here’s how:
Your credit reports and scores reflect how you manage debt, and they play a role in many aspects of your financial life. Learn how to check your credit and understand your score.
Loans should be used for specific goals, not everyday spending. A strategic move might include:
Being thoughtful about why, how, and when you borrow makes the difference between helpful and harmful debt.
It’s important to remember that not all debt is equal. Some debt can serve a purpose and even improve your life, while other kinds should be avoided at all costs. Before taking on any new debt, always ask:
Let’s summarize a few final terms you should know:
Learning about debt types—like student loan debt, mortgage debt, and household debt—can help you better understand your total financial picture.
For one-on-one help, call us for student loan assistance.
Debt is a tool. Like any tool, it can help or hurt depending on how you use it. Make every borrowing decision with your long-term goals in mind. Avoid bad debt when you can, and manage good debt responsibly.
If you’re unsure where to start, Credit.org is here to help. We offer trusted, nonprofit support to help you understand your options and take control of your finances.
If debt is becoming a burden or you’re unsure what your next step should be, reach out to the nonprofit counselors at Credit.org. We offer a wide range of services to support your financial goals:
Take the first step toward financial peace of mind. Talk to a certified counselor today.
