What is Bad Debt?

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In a perfect world, everything would be affordable and you’d have enough money in the bank to cover what you buy.

But big expenses often require borrowing, and credit cards, while useful, can make it easy to over extend and carry a balance.

In fact, nearly half of Americans who currently have revolving credit card debt (47%) say that debt is likely to increase in 2026, according to a NerdWallet survey.

The key is to be judicious about your borrowing habits, mindful of income limitations and aware of how easy debt can go from good to bad, and even toxic. Start by understanding the differences.

What is good debt?

Examples of good debt include a mortgage or a student loan. These types of loans typically have a low fixed interest rate and finance something that can grow in value.

It’s also good if the interest is tax-deductible, like some mortgage and student loan interest.

Debt tends to turn bad when you take it on at high interest rates to pay for things that lose value.

Examples include high-interest personal loans for discretionary purchases such as vacations, auto loans that stretch five years or longer, or high-interest credit card debt with increasing balances.

What is toxic debt?

Toxic debt can cost you the most. It consists of no-credit-check and payday loans with APRs above 36%, loans with a repayment time so long you end up paying more than the item is worth or high-interest loans requiring collateral you can’t afford to lose, like your car.

Debt like this has crushing interest costs and limits your cash flow, savings and ability to borrow for goals like buying a home, says Erika Safran, a certified financial planner with Safran Wealth Advisors in New York City.

It can take you off your game and send you off track for years.

Common warning signs of having too much debt

A debt load — the total of all your debt obligations — that exceeds 36% of your gross income can be difficult to pay off and can make accessing credit more challenging.

Use this tool to calculate your debt-to-income ratio and watch for these signs:

Your debt balance is not going down despite regular payments.
You’re living paycheck to paycheck, with no money at the end of the month.
You’re not contributing to an employer-sponsored retirement plan because you need the money.
You’re unable to build an emergency fund of at least $500 to buffer against financial shocks.
You’re using credit cards for cash advances.

If you can't keep up with payments, then it’s likely time to get help. Explore loan consolidation, a debt management plan or look into debt relief.

» Learn more: How to pay off debt

Tommy Tindall is a lead writer and content strategist covering how to make money — and how to keep it. He’s recorded and written about his experience testing popular gig jobs like driving for Uber, delivering with DoorDash and full-service shopping for Instacart. He loves making an extra buck, but laments the hours of awkward silence he endured as an Uber driver (never again).

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Sean Pyles, CFP®, is producer and host of NerdWallet's "Smart Money" podcast. On "Smart Money," Sean talks with Nerds across the NerdWallet Content team to answer listeners' personal finance questions. With a focus on thoughtful and actionable money advice, Sean provides real-world guidance that can help consumers better their financial lives. Beyond answering listeners' money questions on "Smart Money," Sean also interviews guests outside of NerdWallet and produces special segments to explore topics like the racial wealth gap, how to start investing and the history of student loans.