What is the Difference Between Good Debt and Bad Debt? / By: Samantha Loies

Generally, when people hear the word “debt,” they automatically think of how damaging it may be to their finances. In personal finance, "good debt" and "bad debt" often emerge as crucial distinctions for individuals seeking financial stability. Good debt refers to debt incurred to purchase investments that have the potential to increase in value over time or provide long-term benefits. A prime example is a mortgage, which allows individuals to purchase a home—a valuable asset that typically appreciates over the years. Similarly, student loans are considered good debt when they contribute to acquiring education and skills that enhance earning potential. (Capital One, 2023) 

Conversely, bad debt involves borrowing for non-appreciating assets. High-interest credit card debt is an example, as the interest rates can accumulate rapidly, leading to financial strain. Taking out loans for assets, like luxury items, may also fall into the bad debt category, as these purchases don't typically appreciate, and taking on too much “bad debt” may result in long-term financial consequences (Smith, 2023). The distinction lies in the potential return on investment. Good debt can be seen as an investment in one's future, contributing to financial well-being. Bad debt can hinder long-term financial goals. A student at Walter Payton said to stay away from credit card debt, most importantly. “The myth is you need to carry debt on a credit card to build credit. I think the best way to manage your credit card is to pay it in full every month.”

According to Matt Schulz, Americans’ total credit card balance is $1.079 trillion in the third quarter of 2023, according to the latest consumer debt data from the Federal Reserve Bank of New York. That’s up from a record $1.031 trillion in the second quarter of 2023, leaving the balance the highest since the New York Fed began tracking in 1999 (Schulz, 2023).  Individuals should prioritize managing bad debt while utilizing good debt to build wealth. Take little steps to get your finances under control. Derison Puntier, a financial coach with Working Credit, believes there is an easy first step to managing all kinds of debt. “Create a budget. Do not let that budget be restrictive. A budget is supposed to be empowering.” 

Making conscious choices about borrowing and understanding the potential returns are critical elements in achieving financial stability. By embracing good debt and minimizing bad debt, individuals can pave the way for a more secure financial future.

Sources:

https://www.capitalone.com/learn-grow/money-management/good-debt-vs-bad-debt/

https://www.investopedia.com/articles/pf/12/good-debt-bad-debt.asp#:~:text=Good%20debt%20has%20the%20potential,they%20can%20afford%20to%20lose

https://www.lendingtree.com/credit-cards/study/credit-card-debt-statistics/#:~:text=How%20much%20credit%20card%20debt,Reserve%20Bank%20of%20New%20York