Debt is often painted with a broad brush — either as something to fear and avoid at all costs or as a necessary tool for success. The reality is more nuanced. Not all debt is created equal, and understanding the difference between “good” debt and “bad” debt can be the difference between building wealth and digging a financial hole.

By learning how to use good debt strategically — and avoiding bad debt traps — you can make debt work for you instead of against you.

What Is “Good” Debt?

Good debt is money you borrow to acquire something that will appreciate in value or generate income over time. It’s the kind of debt that, when managed properly, can improve your net worth and open new opportunities.

Examples of Good Debt

• Student Loans: When taken for valuable, in-demand degrees, they can increase your lifetime earning potential.
• Mortgage: Buying property can build equity and provide appreciation over time.
• Business Loans: Financing equipment, inventory, or marketing to grow a profitable business.
• Investment Property Loans: Rental properties can generate passive income while appreciating in value.

What Is “Bad” Debt?

Bad debt is borrowing for things that quickly lose value and don’t generate income — often at high interest rates. This type of debt drains your finances and limits your ability to save or invest.

Examples of Bad Debt

• Credit Card Balances: Carrying high-interest credit card debt for non-essential purchases.
• High-Interest Personal Loans: Loans taken for vacations, luxury items, or impulse buys.
• Car Loans on Depreciating Vehicles: Buying more car than you can afford without considering depreciation.
• Buy Now, Pay Later Traps: Splitting payments for items you don’t truly need.

The Key Differences Between Good and Bad Debt

How to Use Good Debt Wisely

• Only borrow what you can comfortably repay.
• Shop around for the lowest interest rates.
• Ensure the borrowed funds are going toward an appreciating or income-generating asset.
• Have a repayment plan before you borrow.

How to Eliminate Bad Debt Quickly

• Pay more than the minimum to reduce interest costs faster.
• Use the debt snowball or avalanche method to focus payments.
• Consolidate high-interest debt into lower-rate options.
• Cut unnecessary spending to free up extra repayment money.

Final Thoughts

Debt isn’t inherently bad — it’s a tool. Used wisely, it can help you buy a home, grow a business, or earn a degree that pays off for decades. Used carelessly, it can sabotage your financial future. Learn to recognize the difference, and you’ll make debt work for you, not against you.