5 key differences between good debt and bad debt

By Jackie Lam

Reviewed by Jill Cornfield

May 14, 2024

Read time: 4 min

Young couple reviewing finances and debt with a laptop and bills in their living room.

Key Takeaways:

  • Good Debt Helps You Reach Financial Goals: Loans for education or a mortgage can lead to career growth and home ownership.

  • Bad Debt Is Expensive and Hard to Repay: Avoid high-interest loans like car title loans, which can trap you in a cycle of debt.

  • Debt Traps Are a Sign of Bad Debt: If you're struggling to pay down debt and only managing interest, it’s time to seek help.

You've likely heard the noise: Personal finance pundits with extreme views shouting from the rooftops: All debt is bad. You know the ones—they can crush your soul and make you feel like a financial dunce. Here’s another view. 

First, debt happens. 

Second, there's such a thing as good debt versus bad debt. And your gut tells you that there are scenarios where debt is perfectly okay. Specifically, when it can help you reach your financial goals or improve your life. 

When you’re facing a new debt situation, it could be Batman or the Joker smiling back at you. Let's look at some key differences between good and bad debt, and how to spot them. 

1. Good debt helps you get closer to your money goals 

Taking on debt can sometimes feel painful—sure, it's an added financial responsibility. But debt can be a tool that helps you get closer to your financial goals and build wealth. 

For instance, you might take out a loan to pursue a degree or certification. That investment in your education could help you establish a career or get a raise. 

2. Good debt increases your wealth or improves your life

Some kinds of debt could put you in a better position. Not in a here-and-now, help-you-feel-alive kind of way. But by significantly improving your life in the long run. 

A mortgage is a great example of a debt that could help you build wealth. Over time, as you pay down your mortgage debt, your home equity grows. Home equity is the difference between what you owe on your mortgage and what your home is worth. (You can also build equity if your home value rises.) Once your mortgage is paid off, you have 100% equity. The more equity you have, the more money you could keep from the eventual sale of your home. You might also qualify to borrow against your home equity. A home equity loan can be a great way to finance a large expense, including fixing up your home to retain or increase its value.

A car is a great example of a debt that could significantly improve your life. Many of us need a car to get to and from work each day. Your car could also help you build wealth, such as if you use it for ride-sharing or delivering groceries, side hustles that could help you increase your income. 

3. Very expensive debt is bad

We all need money sometimes, but don’t take on a debt that’s super expensive, or you could make your situation even worse by borrowing. 

For example, you might notice a storefront near you offering fast cash with car title loans. The problem is that car title loan lenders generally charge 300% APR or more. Normal interest rates top off at around 36%, and the lowest interest rates are in the single digits. 

Extremely expensive debts tend to be extremely hard to pay off. If you have a serious need for cash, first try to qualify for a traditional personal loan. If that doesn’t pan out, it might be better to try to get help from friends and family before taking on an expensive loan.

4. A debt is bad if it traps you in a cycle of debt

Even good debt can turn bad if it leaves you stuck in a debt trap, struggling to get rid of your debt. If you can’t afford to pay your debt down, you could spend years or decades pedaling as fast as you can just to keep up with interest charges. Instead of enhancing your life, unaffordable debt follows you around like a dark cloud. 

You might be carrying too much debt if your credit card balance is close to your credit limit, if your balance goes up instead of down, or if you find yourself falling behind on payments. Credit card debt could be bad debt if it keeps you from qualifying for a mortgage or doing what you want with your money. 

Doing the balance transfer shuffle is also a red flag that you might be trapped. Taking out new credit cards to pay off your existing credit card debt starts to look like a debt trap if you do it repeatedly. If you think you’re trapped in debt, consider resolving your debt or talking with a debt expert who can help you find solutions to help.

5. Credit card debt might be okay in some scenarios 

The high-interest goblin doesn't always jump out from behind credit card balances. For instance, if you need to take on credit card debt for something you need, and you have a solid plan to pay off the balance over time, using a credit card could get you through a financial emergency.  

Should life throw you a curveball and you find yourself showering with no hot water, changing a blown-out tire on the side of the road, or saddled with medical bills, credit card debt might indeed improve your life. As long as you keep your eye on your balance and have a game plan for knocking out that debt ASAP, credit card debt doesn’t have to lead to an endless hole that’s hard to climb out of.

Safeguards for avoiding unnecessary debt

To stay on track so that you can head off debt before it happens, download the Achieve MoLO™ app. By tracking your cash flow, spending, and saving habits, the MoLO app can help you find money left over in your budget each month that you could use to tackle your debt. 

With good debt versus bad debt, it boils down to value. Knowing the cost of your debt versus the value it brings into your life can help you figure out whether it's worthwhile. 

At the end of the day, it's about weighing your options and managing your money so that you can ultimately reach financial freedom.

Jackie Lam - Author

Jackie is an Achieve contributor. She is an accredited financial coach (AFC®) who has written for Business Insider, BuzzFeed, CNET, USA Today's Blueprint, and others. She coaches artists and freelancers.

Jill Cornfield

Jill is a personal finance editor at Achieve. For more than 10 years, she has been writing and editing helpful content on everything that touches a person’s finances, from Medicare to retirement plan rollovers to creating a spending budget.

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