Money Myth or Fact: Not All Debt is Bad

Debt tends to get a bad rap. We’ve seen it before in countless stories—both real and fictional—of debt ruining lives. While debt is certainly something you should be careful with, not all debt is automatically “bad”.

In fact, certain types of debt can provide opportunities to improve your financial future. Debt is all about smart borrowing, understanding the difference between “good” and “bad” debt, and knowing how to manage it.

However, it’s important to remember that generally, you should not borrow excessively and in amounts more than you can handle. Even “good” debt can become a financial burden when you take on too much of it.
 

WHAT MAKES DEBT “GOOD”?

Certain characteristics can make debt more financially beneficial. Generally “good” debt is debt that is manageable, has relatively favorable interest rates, may offer potential tax advantages, and helps you work toward your long-term financial goals.

Some examples include mortgages and student debt.

Mortgages can be considered “good” debt because interest rates are typically lower compared to other types of consumer debt and the interest may be deductible for eligible borrowers. Owning your own home also aids in building wealth over time and may improve your quality of life as well. For instance, buying a home could allow you to move closer to work or into a neighborhood that better suits your needs.

Student debt can similarly fall into the category of “good” debt. Rates are comparatively low and interest can be tax-deductible depending on income and other factors. Higher education can also increase your opportunities of employment and career advancement, potentially providing financial benefits further down the road.
 

WHAT MAKES DEBT “BAD”?

Debt becomes detrimental when it comes with high interest rates or is used on non-essential items that lose value quickly, such as clothes and electronics.

A major example is credit card debt. The average American carries over $6,000 in credit card debt. Credit cards are convenient and can be very helpful with building credit but only when they’re used wisely. If your card isn’t being paid off every month, interest begins accruing and it’s easy for your balance to quickly become difficult to manage.
 

GUIDELINES TO HELP MANAGE DEBT

As a general rule of thumb, keeping your debt below 36% of your pre-tax income can help keep your debt at a manageable level. Keeping it at 30% or less means you’re doing great! The goal is to make sure your debt doesn’t take up too large a portion of your income.

Carrying debt without having a solid plan to pay it off can lead to an unsustainable and financially fragile lifestyle. Before taking out a loan, make sure to thoroughly research your options, understand the terms, and consider whether the payments fit comfortably within your budget.

Remember: borrowing money isn’t inherently good or bad. What matters is how much you borrow, why you’re borrowing it, and whether you have a realistic plan to pay it back.