Good Debt vs Bad Debt

We often hear people say that debt is bad. But borrowing money isn't automatically a bad financial decision.

The real question is what you are borrowing for, how much you are borrowing, and whether you can afford to repay it.

When can debt be useful?

Some borrowing can help you achieve something that would be difficult to pay for upfront.

Imagine someone takes an education loan to pay for a degree. They are taking on debt today with the expectation that the education will help them build skills and earn an income in the future.

Similarly, a business owner might borrow money to buy equipment or open a new location. If the business succeeds, the borrowing could help generate more income than the cost of the loan.

This doesn't mean these loans are automatically “good.” They still involve risk and interest. But the money is being borrowed for something that could potentially create future value or income.

When can debt become harmful?

Debt becomes more concerning when you repeatedly borrow money for things you cannot comfortably afford, especially when the purchase doesn't create future value.

Imagine someone regularly uses a credit card to pay for expensive clothes, restaurants and entertainment, even though they don't have enough income to cover the bills. If they cannot repay the balance, interest can quickly make what they bought much more expensive.

The problem isn't that they used a credit card. The problem is borrowing without a realistic plan to repay.

So, is there really such a thing as “good” and “bad” debt?

There isn't a perfect rule.

A loan for education, a house or a business can still become a financial burden if it is too large or too expensive. On the other hand, borrowing for something considered unnecessary doesn't automatically make the debt disastrous if it is repaid comfortably.

Instead of simply asking “Is this good debt or bad debt?”, ask:

What am I borrowing for? How much will it cost me? And can I realistically repay it?

Understanding those questions is what makes borrowing a financial decision rather than simply a way to get money today.

And now that we understand credit, loans, credit scores and different types of debt, the final question is perhaps the most important one: how do you decide whether taking on debt is actually worth it?