Is Debt Ever Healthy? How to Tell the Difference Between Good and Bad Debt

Preston Rosamond |

We all have our reasons for taking on debt, and they can vary widely from person to person. While the word “debt” often has negative associations, sparking thoughts of financial hardship and repayment burdens, it’s not always a bad thing. 

In fact, in certain situations, debt can be a tool for building a brighter future. At the same time, it can also lead to a cycle of borrowing and repayment that feels like a never-ending cycle. In this guide, we aim to help you understand the difference between healthy and unhealthy debt, so you can feel empowered to make informed financial decisions while avoiding potential pitfalls.

What Is Good Debt? 

The term “good debt” describes debt that has the potential to increase your net worth or improve your financial situation over time. Ultimately, the strategy behind the good debt outweighs the cost of borrowing. This is ideally low-interest-rate debt with affordable repayment terms. 

This would be the case if your debt was used to purchase an asset that appreciates over time. It might also be considered good debt if it’s used to invest in learning skills that could increase your income over time. 

Good Debt Examples

Several affordable forms of debt could help you increase your net worth or improve your finances. Here are three of the most common examples of good debt:

  • Mortgages: A mortgage allows you to purchase a home you likely wouldn’t be able to pay for outright. A home is likely to appreciate in value, and interest rates are generally lower compared to other forms of borrowing. 
  • Car loans: Having reliable transportation is a necessity for many people. If you don’t have the cash on hand to buy a car, a car loan facilitates the purchase. It might enable you to take a higher-paying job or accept other income opportunities. Just be sure your car loan is affordable or it could easily qualify as a bad debt. 
  • Student loans: Having a degree doesn’t guarantee a high-paying job, but it does improve your chances of earning more over your lifetime. As of 2022, the Federal Reserve reports recent graduates with a bachelor’s degree earn a median of $54,000 compared to high school graduates earning a median of $34,320. 

What Is Bad Debt?

Bad debt makes your financial situation worse and is typically used to buy consumer goods or to purchase something that loses value over time. Bad debt typically carries high interest rates, fees, and even unreasonable repayment terms. It can become a financial nightmare if not managed properly. 

Since bad debt usually has a high interest rate and fees, it’s easy for the compounding interest to snowball out of control and make repayment difficult. A quick way to tell a good debt from a bad debt is to ask yourself whether this will help you make more money in the future. 

Bad Debt Examples

Several forms of borrowing are considered bad debt. The only one that is ambiguous here is a personal loan. 

  • Credit card debt: Most credit cards have high compounding interest that comes into play when you hold a balance month after month. If you have rates over 20%, it means you’re paying significantly more for each purchase you’ve made on the credit card.
  • Payday loans: This type of predatory debt is banned in many states. Payday loans often have interest rates of almost 400% paired with excessive hidden fees, which can make paying off your debt nearly impossible. 
  • Personal loans: A “bad debt” personal loan would be one used to finance purchases such as a vacation, new furniture, or a new wardrobe—things that don’t appreciate in value. However, a personal loan used to consolidate high-interest debt could be a good debt.

Is Having Debt Ever a Good Thing? 

So, is having debt ever a good thing? The answer is yes—but with some caveats. Certain types of debt can help you get ahead and build a greater net worth over time when managed well. Other forms of debt could create financial pitfalls making it even harder to experience a life of financial freedom.

Having debt isn’t inherently good or bad; it’s about the type of debt you choose and how you manage it. Making smart financial decisions begins with paying attention to factors such as how much you’re paying to borrow the money (interest charge), the purpose of the debt, and your ability to repay it.

Struggling With Debt? We’re Here to Help.

Having a mountain of debt looming can be downright stressful. But fear not! When you’re working toward financial freedom, teaming up with an experienced financial professional can make all the difference. At The Rosamond Financial Group, we work to craft a plan that leverages good debts while reducing the ones keeping you stuck. 

Ready to take control of your finances? Let’s chat! Call my office at 830-798-9400 or email solutions@rosamondfinancialgroup.com.  

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About Preston

Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing solutions@rosamondfinancialgroup.com or schedule a call on his online calendar.