Borrowing money is something most people will experience in their lifetime, whether it’s for a car, a home, or education. But not all debt is the same. It’s important to understand the difference between good debt and bad debt to make the right decisions that support your long-term financial health. The goal isn’t just to borrow but to borrow wisely so that you don’t become part of America’s debt statistics:
Total Consumer Debt: As of the third quarter of 2024, total U.S. consumer debt reached approximately $17.57 trillion, marking a 2.4% increase from $17.15 trillion in the same quarter of 2023. experian.com
Mortgage Debt: Mortgage balances grew by $11 billion in the fourth quarter of 2024, totaling $12.61 trillion by the end of December. newyorkfed.org
Credit Card Debt: In the third quarter of 2024, U.S. credit card debt hit a record $1.17 trillion, up from $770 billion in the first quarter of 2021. theguardian.com
Auto Loans: Auto loan balances increased by 3.2% year-over-year as of March 2024, reaching $1.64 trillion. equifax.com
Student Loans: Student loan balances accounted for 32% of non-mortgage consumer debt, totaling approximately $1.61 trillion as of March 2024. equifax.com
Delinquency Rates: In the first nine months of 2024, lenders wrote off over $46 billion in delinquent credit card loans, a 50% increase from the previous year and the highest level since 2010. nypost.com
Credit Card Interest Rates: The average credit card interest rate stands at approximately 28.6%, significantly higher than rates for other types of loans. theguardian.co
What Is “Good Debt”?
In this world of rising debt figures, you might be surprised to know that some types of debt are actually beneficial to your financial future. In essence, good debt is money you borrow to invest in something that has the potential to increase your wealth or financial stability over time.
Key Features of Good Debt:
- Low interest rates
- Potential Tax benefits
- Helps build assets or income-generating opportunities
Examples of Good Debt
- Home Loans (Mortgages):
A mortgage is one of the most common examples of good debt. By purchasing a home, you’re building equity over time. Real estate typically appreciates, meaning that the value of your property could grow. Plus, mortgage interest is often tax-deductible, which can make borrowing for a home even more affordable. Real-World Example: Imagine you buy a home for $250,000 with a 3.5% interest rate. Over time, not only does the value of the home have the potential to increase, but the mortgage interest is usually tax-deductible, which can lower your overall tax burden. - Student Loans:
Education can significantly impact your earning potential, and student loans provide the means to gain that education. Typically, student loans offer lower interest rates than other forms of borrowing, and in some cases, interest paid on these loans may be tax-deductible. Real-World Example: Taking out a student loan for a degree that leads to a higher-paying job can offer a great return on investment. For instance, a degree in engineering or healthcare may lead to a job with a salary that far outweighs the cost of the loan.
What Is “Bad Debt”?
On the flip side, not all debt is a wise choice. Bad debt refers to borrowing that doesn’t add long-term value and often comes with high-interest rates, making it more difficult to pay off. This type of debt can work against you and slow down your financial progress.
Key Features of Bad Debt:
- High interest rates
- No long-term value
- Increases financial strain
Examples of Bad Debt
- Credit Cards:
Credit cards are convenient, but if you don’t pay off your balance in full every month, the interest quickly accumulates. Interest rates on credit cards can be sky-high, often exceeding 20%—which means you’re paying a lot more than the original cost of your purchases. Real-World Example: If you have $3,000 on a credit card with an 18% APR and only make the minimum payment, you’ll pay hundreds of dollars in interest. In the end, you may end up paying far more than you borrowed, making this type of debt costly. - Auto Loans for New Cars:
Taking out a loan for a new car may seem necessary, but new vehicles lose value the moment you drive them off the lot. When you borrow money to buy a new car, you’re essentially financing something that’s depreciating. Plus, long loan terms mean you could still be paying for the car long after it has lost much of its value. Real-World Example: Let’s say you buy a new car for $30,000 on a 5-year loan. By the time your loan is paid off, the car could be worth significantly less, meaning you’ll be stuck paying off debt for something that’s no longer worth what you paid for it.
Managing Debt for a Stronger Financial Future
While taking on debt may seem unavoidable, managing it wisely is what makes the difference between a financial burden and a smart investment. Here are a few strategies to help you keep your debt under control:
- Focus on Low-Interest Debt:
When possible, aim to take on debt with low-interest rates, such as mortgages or federal student loans. High-interest debt, like credit card debt, can quickly snowball and make it harder to build wealth. Prioritize paying off high-interest debt first. - Stay Within Your Means:
Just because a debt is considered “good” doesn’t mean it’s always the right decision. Don’t take on more debt than you can handle. For example, while mortgages are generally a form of good debt, buying a home that stretches your budget too thin can turn it into a financial strain. The same goes for student loans—only borrow what you need for your education, and avoid over-borrowing. Budgeting can be a strong tool to keep you within your means – if you need any assistance, you can start with this article. - Plan for Debt Repayment:
Create a realistic plan to pay off your debt. Focus on paying off high-interest debt first, such as credit card balances. Once you’ve tackled that, work your way down through other loans, like auto loans or student loans. - Consider Your Debt-to-Income Ratio:
Keep an eye on your debt-to-income ratio, which is the percentage of your income that goes toward paying debt. A healthy debt-to-income ratio is usually below 36%. If it rises above 40%, it may be time to reassess your finances and take steps to reduce your debt.
According to Charles Schwab,
| If your debt is… | Then… |
| 30% or less of your pre-tax income | You’re in good shape |
| You’re in good shape | You’re doing OK |
| Between 37% and 40% | Beware, you’re on the borderline |
| More than 40% | Red flag warning |
Final Thoughts: Debt Can Be a Tool, Not a Trap
The key takeaway is that debt isn’t inherently bad—it’s how you manage it that matters. Good debt, when used wisely, can be a powerful tool to help you achieve your goals, such as buying a home or furthering your education. However, bad debt can lead to financial struggles if it’s not managed carefully.
By borrowing responsibly, paying off high-interest debt quickly, and staying within your financial limits, you can harness the power of good debt to build a brighter future without letting debt hold you back.
Sources
- Total Consumer Debt:
Source: Experian, U.S. Consumer Debt Study, Q3 2024
Experian - Mortgage Debt:
Source: Federal Reserve Bank of New York, Household Debt and Credit Report, Q4 2024
Federal Reserve Bank of New York - Credit Card Debt:
Source: The Guardian, U.S. Credit Card Debt Hits Record, Feb 2025
The Guardian - Auto Loans:
Source: Equifax, U.S. National Consumer Credit Trends Report, March 2024
Equifax - Student Loans:
Source: Equifax, U.S. National Consumer Credit Trends Report, March 2024
Equifax - Delinquency Rates:
Source: New York Post, U.S. Credit Card Defaults Reach Highest Levels Since 2010, Dec 2024
New York Post - Credit Card Interest Rates:
Source: The Guardian, Credit Card Interest Rates Soar to 28.6%, Feb 2025
The Guardian
Disclaimer: The information provided in this article is for educational purposes only and should not be construed as financial advice. Investing in stocks involves risk, and it’s important to conduct your own research or consult with a licensed financial advisor to determine what is best for your individual circumstances. Readers are encouraged to seek professional guidance before making any investment decisions.