Good Debt, Bad Debt – Is There a Difference?

Debt is like cholesterol – there’s good and there’s bad – and everyone has it.

In fact, the average American household is carrying more than $165,000 in debt. That amount of average household debt has pushed the national total to $16.5 trillion, according to a recent study, and it’s more than a heap of unpaid bills. It’s a portfolio that shows what we’re spending our money on and the types of credit we’re using to pay it off.

Credit score watchers may know this as credit mix and may also toss in the words “good” and “bad” to describe debt that’s in the mix, with particular distaste for credit card charges.

What we wanted to know: if it’s all being paid, what makes debt good or bad?

What we found: it’s murky.

It’s what you’re buying, not what you’re paying

The basic idea behind the labels is that good debt is something that could grow in value, like a house, or something that can help you earn more money, like a degree.

Bad debt is generally applied to items that have little inherent value or that lose their value, like a new car. Yet this same “bad-debt” car can be considered good debt if it’s essential to getting you to and from the job that lets you earn a salary-enhanced degree.

This good/bad concept is why credit card debt can feel unsavory – credit cards are usually used to buy things that won’t increase in value or help you earn more money.

A way to keep debt in check

Debt that provides a reward beyond ownership, like a home improvement loan that could have financial benefits later on is generally considered good debt, even though there’s interest.

Debt that provides little more than an opportunity to draw out payments and pay interest is debt without financial reward. Fleeting experiences – like a fancy dinner – could fall into this category. This is typically considered bad debt.

It isn’t always black and white, but a key idea behind debt is that it’s a means to getting something of value. Good and bad debt may come into play as a way to measure what’s worth putting on your tab.