Good Debt vs Bad Debt: What’s the Difference and Why It Matters

Understanding Good and Bad Debt

Debt isn’t always bad. Some debts, called good debt, can help build wealth, like loans for education or buying a house. Other debts, known as bad debt, often come from high-interest purchases and can harm your finances.


What Is Good Debt?

  • Loans that increase your value, such as for education or a home.
  • Investments that help you earn more over time.
  • Lower interest rates and repayment over many years.

What Is Bad Debt?

  • High-interest debts for things like vacations or luxury items.
  • Credit card balances that keep growing because of interest.
  • Short-term borrowing with costs that outweigh the benefits.

Why It Matters

  • Good debt can improve credit score and increase future earnings.
  • Bad debt can trap you in a cycle of interest and reduce savings.
  • Knowing the difference helps you make better money choices.

How to Manage Debt Well

  • Prioritise paying off high-interest debts.
  • Use loans for things that add value or income.
  • Create a budget to track expenses and repayments.
  • Avoid borrowing more than you need.

Understanding good debt versus bad debt helps you borrow smartly, improve financial health, and work toward long-term goals.

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