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

By John Benedict

Many people take on debt for a variety of reasons. It could be a result of medical expenses, a mortgage, student loans, or outstanding credit card payments. The term “debt” often brings up a negative association because many people connect it with financial challenges and the weight of repaying that debt when they may not have the funds to do so.

But debt doesn’t have to be inherently negative. Sometimes it serves as a tool for building a brighter financial future. However, it also can corner you in a cycle of borrowing and repayment. In this article, we discuss how to discern whether a certain type of debt is good and the kind to steer clear of so you can get into a habit of healthy debt management.

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 that 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

There are several affordable forms of debt that 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 that 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 that 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

There are several forms of borrowing that are considered bad debt. The only one that’s 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 that 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 that make 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 borrowing 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 Can Help

At J2 Capital Management, we understand that having a substantial amount of debt looming over you can be daunting—and at times overwhelming. As you work toward financial freedom, collaborating with a skilled professional can help you devise a strategy to tackle both good debt and bad debt while instilling confidence in your financial future. Schedule a meeting online or reach out to us at info@j2cmonline.com or 248-641-4444 to receive our support toward healthy debt management.

About John Benedict

John Benedict is CEO, investment advisor representative, and portfolio manager at J2 Capital Management, a boutique financial advisory firm specializing in in-house custom financial planning, tax, estate, and investment management. With over 20 years of experience, John is passionate about helping clients navigate uncertain markets, reduce risk, and plan for a sound future. John combined his talents and passion in statistics and technical analysis to create J2’s tactical strategies, managing them since the beginning of the organization. He is known for being a visionary and continually looking for ways to improve J2’s services and strategies to better serve his clients. John graduated from Central Michigan University with a degree in business administration and finance, and his thoughts on markets and technical analysis have appeared in The Wall Street Journal, Investment News, and on Moneyshow.com. He was also a contributor to the book The StockTwits Edge: 40 Actionable Trade Set-Ups from Real Market Pros.

When he’s not working, you can find John boating or participating in water sports and spending time with his wife, Janine, and his three children, Jack, Alexis, and Saraphina. To learn more about John, connect with him on LinkedIn. You can also register for his latest webinar on What Makes J2 Capital Management Different From Other Financial Advisors.