The Difference Between Good Debt and Bad Debt

Debt - most of us can’t stand it. When we think about how much we owe on our homes, cars, student loans, credit cards, etc., it can be overwhelming. Have you ever wished that you could just win the lottery so that you could pay off your debt? Just a high enough jackpot to pay off your bills to live debt free would be great, right? 

Well, don’t wish away all of your debt. In the eyes of lenders, there is such a thing as “good” debt and bad debt and it’s helpful to know the difference.

Lenders may be more favorable with certain debts. Having debt on something that could increase in value over time and may contribute to your overall financial health could be considered “good” debt. 

Here are two examples of “good” debt:

• Home purchase – Homes usually appreciate in value, so your mortgage loan may be considered an investment. 
• Student loans – This debt may be considered “good” because it’s usually used towards education – which in turn could help you earn money over a lifetime.

So what is a bad debt? Disposable finances or money spent on things you don’t necessarily need can be considered bad debt.

Below are two examples of bad debt:

• Going out – It’s easy to look past these “small” expenses, but they can easily build up. Shopping sprees, going out to dinner and movies can be considered bad debt. 
• Vacations – That trip to the Bahamas you were planning on going to later this year before you paid off your other bills could be another example.

There’s a fine line between “good” and bad debt and it can be easy to lose track of your expenses. Consider getting your credit history by regularly reviewing your credit report. This may be helpful when prioritizing your payment plans for the future.