Good debt vs bad debt explained

Debt is often thought of in a negative way, but not all debt is created equal. In fact, some forms of debt can be a useful tool for achieving long-term financial goals, such as buying a home, investing in education, or growing a business. This guide explores the different kinds of debt, breaks down good debt vs. bad debt, and offers tips for how to use debt responsibly to support your financial future.

The difference between good debt and bad debt

Not all borrowing affects your finances the same way. Some debt can support long-term goals, while other debt can add costs and limit flexibility. The sections below explain how to tell the difference and when each might make sense.

What is good debt?

Good debt or healthy debt is a type of borrowing that can increase your net worth and support long-term financial growth. It typically involves investments that can increase in value or generate income over time. For example, a mortgage is considered good debt because a home has the potential to appreciate in value and can help a person build equity. Student loans are another example of good debt. While these loans can sometimes be thought of as a burden, investing in your education is considered good debt because a degree or vocational training is often linked to more career opportunities and higher earnings. When used wisely, good debt can be a helpful tool for creating more financial stability down the road.

What is bad debt?

Bad debt does not contribute to long-term financial growth and is often more harmful than beneficial. This type of debt is usually tied to purchases that quickly lose value or are non-essentials that offer no lasting financial return. For example, carrying a high-interest credit card debt or taking out a personal loan to fund a vacation or an unnecessarily expensive item is considered bad debt. These types of purchases may seem rewarding in the short term, but they can often lead to financial strain if you have difficulty paying it off. Plus, you may end up paying a significant amount in interest without gaining any long-term value or return.

Recognizing when debt is dragging you down, such as making only minimum payments, accumulating high interest, or borrowing for wants rather than needs, is essential for maintaining healthy debt habits and helping avoid financial setbacks.

How much debt is bad?

Debt becomes bad when it consistently exceeds your ability to pay it off, causes you to make only minimum payments, racks up substantial interest, or stems mainly from non-essential or depreciating purchases. If debt leads to financial stress or limits your ability to save and invest, it is generally considered too much.

How different kinds of debt can impact your financial outlook

Different kinds of debt can affect a person’s financial wellbeing and how they approach money. The difference between good debt and bad debt often depends on interest rates, repayment terms, and whether the debt contributes to long-term financial goals. Secured debt, like mortgages, is typically seen as more stable, while unsecured or high-interest debt, like credit cards, can quickly become unmanageable. High-interest debt is often the most damaging and the hardest to pay off, and it can have lasting effects on overall financial health. Over time, it may lead to growing balances, reduced credit scores, and limited access to future borrowing, which could make it harder to reach long-term financial goals.

Why healthy debt is good for your financial future

Healthy debt is an investment in your future and can support long-term money management. Borrowing money for a home, business, or higher education can help a person build net worth and boost their earning potential. When used strategically, healthy debt can open doors to new opportunities and help you prepare for future goals like retirement and estate planning and strengthen overall financial stability. By taking steps to manage debt responsibly, you can also improve creditworthiness and help make it easier to qualify for future loans.

How to make ongoing debt and money management part of a financial plan

Just as a budget can help track income and expenses, a structured debt strategy can help you prioritize paying down debt. This may include paying more than the minimum balance, consolidating high-interest debt, or setting up automatic payments so you don’t miss due dates.

A well-rounded plan also supports healthy debt habits and can help a person focus on borrowing that contributes to their financial growth while keeping unnecessary debt in check. Over time, this proactive approach can help improve credit, reduce financial stress, and support broader financial goals.

Prioritize money management into the future with North American

Focusing on money management today can help set the foundation for a more secure financial future. By finding smart debt strategies that work for you, you can improve financial stability and work toward your financial goals more easily. North American also recommends considering partnering with a financial professional who specializes in financial products like annuities and life insurance. They can share ideas for helping enhance your plan, protect your assets, generate retirement income, and provide greater long-term financial security for yourself and your loved ones.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.

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