Good Debt vs. Bad Debt

When most people think of debt, they automatically assume it’s a bad thing to owe money. However, according to Investopedia, at its most basic function, debt simply means:

An amount of money borrowed by one party from another.

Based on this definition, debt sounds pretty neutral, disowning its bad rep. The fact of the matter is that debt sometimes can’t be avoided and must be accepted as a financial reality, so to speak.

What most fail to realize is that there is a such thing as “good debt,” as there is bad debt. Good debt can be used as a gateway to financial literacy and empowerment. If you don’t know the difference between good and bad debt, here are some examples:

• Mortgages can be good debt.  In most cases, you can build equity through your property which in turn you can borrow from. You can also sell your property and earn income from your mortgage. It’s a lot better because you don’t gain any finances or any equity from renting, but you can from owning your property, so long as you’re making your payments on time and avoiding default and foreclosure. 
• Credit cards can be good or bad. They’re good if you pay off the balance every month and don’t accumulate a large amount of debt. They’re bad when you owe a lot on the card, especially if it’s accruing high interest rates of, say, 20%. If you have more than three or four credit cards, this can be bad debt, especially if you accumulate large balances on the cards. You never want to owe more than about 10% to 30% on your credit cards, because this adversely affects your credit score and becomes bad debt. If you have below 30% owed on your credit cards and you pay off the credit cards on a regular basis without being late, then they’re good debt because your credit scores increase.