Is There a Thing as Good Debt?

Other Types of Debt

Not all debt can be easily classified as “good” or “bad. ” It often depends on your own financial situation, how you manage the debt, or other factors. Certain types of debt may be good for some people, but bad for others. They include:

• Borrowing to pay off debt: Borrowing money from a bank or other reliable lender to consolidate debt can be advantageous for customers who are already in debt. Since debt consolidation loans usually have lower interest rates than credit cards, you can use them to pay off current debts and avoid having to pay as much interest in the future. But the important thing is to make sure you use the money to pay off debts rather than for other expenses. Investopedia regularly publishes ratings of the best debt consolidation loans.
• Taking out a loan to invest: If you have a brokerage account, you might be able to open a margin account, which enables you to take out a loan from the brokerage to buy securities. Purchasing on margin, as it is known, can result in a profit if the security’s value rises. However, if the security loses value, it could also cost you money. For those who can’t afford to lose money or are novice investors, this kind of debt is not recommended.

What Is Bad Debt?

Bad debt is generally considered money you are borrowing to purchase a depreciating asset.

Debt that is not healthy for your finances typically carries a high interest rate. Carrying too much debt can negatively affect your credit score.

Your credit score will suffer if you use a revolving line of credit excessively, such as by using your credit card to its limit.

For example, you may want to avoid debt for:

• Consumables and clothing: Using a high-interest credit card to pay for necessities like food, furniture, and clothing isn’t the best option. For convenience, use a credit card instead, but be sure you can pay off the entire amount at the end of the month to avoid incurring interest. Otherwise, try to pay cash.
• Boats: Although they’re a fantastic way to pass the time, boats quickly lose value. Consider your options carefully before taking on debt to purchase a boat, as there are many costs involved beyond the vessel’s price.
• Holidays: Unlike groceries and utilities, travel expenses are not required. You will have nothing left to show for your money when the vacation is over. Make sure you have money set aside to pay back the loan quickly if you want to take out a vacation loan to give your family an unforgettable experience.
• Automobiles: Auto loans are a common source of funding if you need to purchase a car for transportation purposes. Secured auto loans frequently have more favorable interest rates than unsecured loans. However, you should still try to avoid taking on debt in order to purchase a car. Like boats, cars are depreciating assets. The car will already be worth less after you drive it off the lot than when you paid for it. If you must incur debt in order to purchase a vehicle, seek out low- or no-interest auto loans.

Credit card rewards programs give cardholders an incentive to spend. However, if you don’t pay off your balance in full each month, the interest you pay could more than cancel out the benefits you receive.

Is There Such a Thing as Good Debt?

Is all debt bad?

Not all debt is bad. Knowing how to properly manage good debt can help you build your wealth. Contrary to what many people think, there’s such a thing as good debt. There are certain purchases and financial goals that offer good return of investment (ROI), such as mortgages, student loans and auto loans.

Is debt a good thing?

Negative phrases like these may be the first to come to mind when you think about debt. But with smart money management and sound decisions, debt can be a good thing. Good debt is debt that’s used to pay for something that has long-term value and increases your net worth (such as a home) or helps you generate income (such as a smart investment).

What is the difference between good and bad debt?

Knowing the difference between what’s considered good and bad debt—and how to handle each—can help you figure out how to manage it all. Debt can be good or bad—and part of that depends on how it’s used. Generally, debt used to help build wealth or improve a person’s financial situation is considered good debt.

What is a good debt?

Fund your future. What is good debt? Good debt is generally considered any debt that may help you increase your net worth or generate future income. Importantly, it typically has a low interest or annual percentage rate (APR), which our experts say is normally under 6%.