What It Means
Good debt versus bad debt is a common way of sorting borrowing by what it pays for and what it costs. Credit bureausCredit bureauA company that collects information about how people use credit and sells it as credit reports; Equifax, Experian and TransUnion are the three nationwide ones. See more and banks such as Experian, Equifax, Fidelity and Chase describe good debt as borrowing that may raise your net worthNet worthWhat you own minus what you owe: the value of your savings, investments, home and other assets, less your mortgage, loans and card balances. See more or future income at a manageable rate, like a mortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more or a student loanStudent loanMoney borrowed to pay for college or career school, repaid with interest after you leave school; it comes from the federal government or a private lender. See more. Bad debt is expensive borrowing for things that lose value or that you didn't need, and a credit card balance carried at a high rate is the usual example. It's a rule of thumb from consumer guides, and the same loan can land on either side depending on its terms and whether you can afford it.
Try It: Check a Debt Against the Usual Questions
Think of one debt you have or are considering. Tick each statement that's true of it.
Tick whatever is true of the debt you have in mind.
This debt matches most of what these guides call good debt. It still has to be repaid on time.
A mix. Look hardest at the rate and whether the payment fits.
This one matches what these guides call bad debt. It's often the first to pay down.
How People Say It
- "The mortgage is good debt, the cards are not."
- "Is a car loan good debt or bad debt?"
- "Student loans are only good debt if you can pay them back."
The Breakdown
Side by side
| Usually called good debt | Usually called bad debt | |
|---|---|---|
| What it pays for | Something that may grow in value or raise income, such as a home or an education | Things that lose value or weren't needed |
| Cost | A manageable interest rateInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more | A high rate, often a card balance carried month to month |
| Common examples in the guides | Mortgage, student loan | Credit card balances carried at a high rate |
| Where it goes wrong | Borrowing more than you can repay, so even a "good" loan strains the budgetBudgetA plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it. See more | Interest piling up on a balance that keeps growing |
Pick this label if. Call a debt closer to good when it buys something expected to hold value or raise your income, the rate is modest, and the payment fits your budget. Call it closer to bad when the rate is high, the purchase loses value fast, or the payment squeezes everything else.
Where the line blurs. Some of these guides note that a student loan can turn into bad debt when the balance is so large it takes years to repay. A mortgage on a home that stretches the budget carries the same risk. A car loanCar loanAn installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral. See more sits in between for many families: the car loses value, but it may be how you get to work.
Good to Know
"Good debt" and "bad debt" aren't formal lending categories; a lender judges an application on things like your credit historyCredit historyThe record of how you've handled credit over the years, as shown on your credit reports: which accounts you've had, for how long, and whether you paid on time. See more, income and existing payments. The labels come from consumer guides by credit bureaus and banks, and they describe general tendencies. Any debt, including one called good, has to be paid on time, and missed payments hurt your credit whatever the loan was for. When you're deciding what to pay down first, the interest rate on each balance is a firmer guide than the label.
FAQ
Is a mortgage good debt?
These guides give a mortgage as a typical example of good debt, because a home may gain value over the years you pay it off. A mortgage that stretches your budget too far carries real risk, since your home secures the loan.
Is credit card debt always bad debt?
A balance carried from month to month at a high rate is the example these guides use for bad debt. A card paid in full by each due date generally avoids interest on purchases.
Is a student loan good or bad debt?
The guides usually list it as good debt, since education can lead to higher income. Some of them point out it can turn into bad debt when the balance is so large it takes years to repay.
Do It in Buhata
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Open BuhataRelated Terms and Categories
- Debt-to-income ratio
Your total monthly debt payments divided by your gross monthly income, shown as a percentage; lenders use it to judge whether you can take on a new payment.
- Student loan
Money borrowed to pay for college or career school, repaid with interest after you leave school; it comes from the federal government or a private lender.
- Mortgage
A loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term.
- Interest rate
The yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost.
- Net worth
What you own minus what you owe: the value of your savings, investments, home and other assets, less your mortgage, loans and card balances.
Sources
Experian, "Good Debt vs. Bad Debt: What's the Difference?"; Equifax, "Understanding Credit: Good Debt vs. Bad Debt"; Fidelity, "Good debt vs bad debt"; Chase, "Understanding Good Debt vs. Bad Debt"
- www.experian.com/blogs/ask-experian/good-debt-vs-bad-debt-whats-the-difference
- www.equifax.com/personal/education/credit/report/articles/-/learn/understanding-credit-good-debt-vs-bad-debt
- www.fidelity.com/learning-center/smart-money/good-debt-vs-bad-debt
- www.chase.com/personal/credit-cards/education/build-credit/good-vs-bad-debt
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