Good Debt vs. Bad Debt

Debt is a loan a person or business receives with the promise to repay the money along with interest. But not all debt is equal: some can propel your future while some can hold it back.

Good debt

This is debt that helps you generate more value than it costs, improving your long-term financial position. Examples:

• Education loans: investing in your training can raise your earning power.
• Business loans: financing a venture that generates profit.
• Mortgages: acquiring property that tends to appreciate over time.

Bad debt

This is debt used to buy things that lose value or to fund consumption, usually at high interest rates. Examples:

• Credit-card balances from impulse purchases.
• Loans for luxury items that produce no income.

The key question

Before taking on debt, ask yourself: does this debt move me closer to my goals or further away? If it finances an asset or increases your ability to earn, it's likely good debt. If it finances consumption that will lose value, it's worth thinking twice.