10
Good Debt vs. Bad Debt
Debt is notoriously complicated. People all over the country are doing everything they can to get rid of it — and avoid racking up more. But, we can actually use good debt to our advantage.
Yes, there’s such a thing as good debt.
Debt can work as a tool to build wealth, increase your credit score, invest in your future and more when used responsibly. Let’s take a look at the difference between the bad and good debt and how you can use it to your advantage.
Up for a debt challenge?
In 10 days, these 10 practical steps could help you get back on the right financial track.
The key to identifying good debt versus bad debt is understanding its purpose. Good debt helps build net worth with large investments (like a home) or further your career goals (like student loans). In the end, it should provide value.
In case you still don’t believe us, here’s what it might look like:
You can also use good debt to finance large purchases, like a car or home upgrades. However, any time you hop on the debt train, it’s important to be realistic about what you can pay back.
If you’re a good credit card user, you already know how payment history, credit utilization and the length of your credit history affect your credit score.
But millions of Americans overlook these easy tips that could help them manage credit card debt even more wisely.
Read more to boost your credit knowledge and keep your credit score in check.
Now, bad debt is what you’ve heard horror stories about. It has high interest rates that make you feel like a hamster on a runaway wheel. You funnel all your extra income to it. And still, debt collectors start calling your office. Unfortunately, Americans have gotten comfortable carrying debt. The average personal loan balance per U.S. consumer was at $11,281 in 2023, according to Transunion credit monitoring.
What was once good debt can end up as bad debt — or it can be that way from the jump. These are some examples of where you are most likely to encounter bad debt:
If you’re worried about your good debt turning into bad debt, or it’s already gotten there, these strategies can help.
Debt can often get out of control during times of crisis. Even if it’s a little bit, budget to put some money into your rainy day fund. It’s a good idea to have three to six months worth of expenses in your savings account. While that feels like a lofty goal, start small and add what you can each month.
Take a look at your sources of debt and tackle the debt that is costing you the most first. This could be a high-interest credit card or a medical bill with a high monthly payment. Freeing up the money to pay down smaller balances can speed up your debt-free journey. And avoid these costly mistakes when paying down credit cards.
You can try the “snowball” approach. For example, if you owe $350 each month to your credit card company, $225 to your car loan and $175 on another credit card, you can focus on paying down your smaller credit card first. Once you pay it off, put that extra $175 per month toward paying down your car loan. Continue that pattern until you now have an extra $400 going toward the balance of your credit card debt.
Listen, we know it’s tough out there. But there’s no shame in asking for help.
These companies make it easy to help yourself and your bank account.
A budget can help you build a good relationship with money. It doesn’t have to be restrictive, but a tool to help you reach your financial goals. Budget for savings, debt payments, and living expenses and be realistic about what you spend in other categories.
If you can live frugally for a short while, you can unburden yourself from the pressure of bad debt and help your good debt stay that way.
Ready to stop worrying about money?
Get the Penny Hoarder Daily
Some of the links in this post are from our sponsors. We strive to provide accurate, reliable information.
Compensation may influence how and where products appear on our site (including their order), and we do not include all companies or offers.