What’s The Difference Between Good Debt Vs Bad Debt?
*This is a collaborative post on good debt vs bad debt but all words, thoughts and opinions are my own
When you think of the word debt most people will think of a negative thing. Taking out credit and owing money can be seen as a sign of poor money management skills. Or people buying things that they can’t really afford. But it isn’t always true. There is a difference between good debt vs bad debt.
There’s certainly an argument to be made that no debt is good debt. But almost all of us will take out some in our lifetimes, especially for big-ticket items like a home. Some forms of debt can be useful and positive. Using credit carefully and correctly can be classed as ‘good’.
Good debt vs Bad Debt- What’s the difference?
Good debt is planned and budget for investments in your financial future. If you take out a small amount now it can keep longer term debts lower or positively impact your life. Good credit counts for assets that don’t lose their value too quickly, or in some instances can grow in value over time.
In contrast bad debt is when you take out credit for items that add little to nothing to your overall assets, life or prospects. They’re generally items that decrease in value quickly or have no value after purchase. For most of us they’ll be items that are a want and not a need.
Examples of good debt
Mortgage
Most people who own a property will take out a mortgage in order to afford it. And investing in bricks and mortar is a good long-term investment, even if you are paying a lot of interest. For most people properties will increase in value over the period you own it and longer term can make you money. Short-term fluctuations are likely to happen and you may even end up in negative equity. But longer-term chances are you’ll make a profit.
When thinking of good debt and bad debt, this is seen as good debt because mortgage interest rates tend to be lower than other types of credit. And having a mortgage can actually work out cheaper than paying out rent. So over a longer period of time you may be saving money.
Car or vehicle loan
While cars general do go down in value over time so you may not make physical money off them in time, but they have plenty of practical benefits. Most of us will need a vehicle to get to work in order to earn money so choosing an affordable car or vehicle on credit is a good example of positive credit. But buying a vehicle on credit can turn into bad debt when you go for a luxury vehicle compared to an affordable alternative. Or choosing a vehicle where the monthly payments are higher than you’d comfortably be able to afford is when it changes from good debt to bad debt.
Good debt vs bad debt- Student loan
A student loan is firmly good debt because you are investing in your own education and your future employment prospects. For many having a university degree means jumping into a higher-paying job sooner. You may want to get into a field such as teaching or medicine where a degree is essential. Or you may want a career in automation like RNA automation where studying would be hugely beneficial. Although not all degrees are of equal value so it’s worth considering the prospects of your field of study before committing.
Taking out student loans does mean starting out your career with a large debt, but student loans have low interest rates. And you’ll only have to pay them back once you start earning over a certain amount.
Business loans
The saying ‘it takes money to make money’ is very true when it comes to business loans. If you run your own business and taking out a business loan can help you to grow and earn more money in the longer term, then this is another example of good debt. Whether the loan is for more equipment, staff or anything else, if the cash injection makes the business more valuable then the debt is well placed. Plus being your own boss is often not just financially rewarding but mentally rewarding.
Examples of bad debt
Credit card debt
While having a credit card can be positive on your credit score, if you have credit card debt that you don’t pay off in full every month then it’s bad debt. If you’re using your credit card to pay for general day-to-day expenses like food or fuel you need to think are you putting them on the credit card because you don’t have enough money to pay for them outright. Or are you putting it on your credit card for ease/ out of habit.
Good debt vs bad debt- Payday loans
Payday loans are short-term loans intended to be taken out for periods of less than 30 days. Or until your next payday when you can pay it off. But payday loans have some of the highest interest rates about. You may only take out a small loan but if you start incurring interest it can escalate very quickly.
Borrowing money to pay off other debts
If you’re using a cash advance from one credit card to pay off another. Or taking out a credit card to transfer debt to this would be seen as bad. Doing this does nothing to resolve the debt you’re in and just puts you in a vicious cycle of moving your debt around. If you’re struggling here are some ways to start clearing off debt. There are some ways that borrowing money to pay off other debts can be a positive thing for you such as taking out debt consolidation to allow you to start clearing your debt.
Good debt vs bad debt
As you’ll see, not all debt is equal. Good debt can increase your net worth or enhance your life, and is done in a controlled manner. Whereas bad debt doesn’t help and generally fills a want or is an indication that you’re struggling and need financial help.
What do you think about good debt vs bad debt?
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20 responses to “What’s The Difference Between Good Debt Vs Bad Debt?”
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Rhian Westbury
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I’m all about good debt! I paid off everything except my mortgage and am so happy to be rid of the credit card debt.
That’s amazing, congrats x
As much as I agree that student loans are good debt, they are also the worst! It’s virtually impossible to pay them down.
I guess that really depends on how much you owe. I don’t know if you’re in the UK but most people I know have either paid them off or have made great progress around 10 years after graduating which is great x
Meh. No debt is good. I get the difference but somehow debt just has the ability to just creep into your life.
It totally depends on how you use it and how you are financially as a person. If you’re someone with zero self control who can spiral easily then yes debt can be bad, but if you are sensible and use it in the right ways then it can be very beneficial x
Always good to touch on the basics of debt.
My fave Dave Ramsey quote, “The thing I have discovered about working with personal finance is that the good news is that it is not rocket science. Personal finance is about 80 percent behavior. It is only about 20 percent head knowledge.”
This is so true, if you can get into good habits and change your behaviour you can achieve great things x
I honestly feel like student loans can be bad debt only because you have to pay them for years and sometimes they can hinder you from using your money for other things or other important purchases. I can’t wait until I pay my student loans off.
Yeah I totally get that and it does depend entirely on how much you’re paying off. But generally how much you paid for the debt (with super low interest rates and only paying back when you earn enough) is covered by additional earnings you should get from having a degree x
I think it definitely depends on the situation when it comes to student loans. If you are absolutely sure about what you want to study it can be good. Otherwise it can easily be a bad debt to pay off and hinders you for years after finishing school. Great look though into choosing your debts and investments.
Oh 100%, if it won’t impact your future earning potentials at all then it wouldn’t be as good a debt as say the debt to become a doctor or something where it’s needed x
I never knew student loan debt was good debt. It was considered bad to me but good to know!
I think it depends on how much. In the UK costs aren’t generally quite as high as in the US and interest rates are quite low x
I never had a student loan but I love how you classifed debts into bad and good debts. Awesome perspective.
Generally I think if you have a mortgage and a car loan that is fine, but extra consumer debts are bad and a burden. I do feel for students who rack up a lot of debt early in life.
I totally agree with you, it’s so easy to get into debt when you’re younger but harder to get out of it x
Definitely agree that some debt is worse than others. Mortgages are good insofar as they allow us to purchase a property over a period of time rather than having to find a huge sum of money all at once, which many of us could never do. I wouldn’t really describe a mortgage as a ‘good debt’ though. Certainly I was very happy to pay mine off a few years ago!
Ohh 100% I think it’s good to pay it off, but it’s a good debt in as far as it’s something you pretty much can’t avoid and it isn’t looked down on by creditors to have a mortgage (as long as you can afford it!) x