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.