Not all debt is created equal. The real framework for telling good debt from bad — so you can use debt as a tool instead of being used by it.
Good debt is debt that builds future value or income. Common examples:
• A reasonable student loan for a degree that increases earnings
• A mortgage for a home that may appreciate
• A small business loan for a venture that generates income
Strong rule of thumb: any debt above 8-10% APR should be paid off as fast as possible. The math rarely works in your favor above that.
Student loans are a great example of how the same product can be either kind:
Key takeaway: Good debt buys things that grow in value or earning power. Bad debt funds past spending at high interest. The exact same loan can be either — what matters is what you bought with it and at what rate.
Questions people ask
Is buying a car always bad debt?
Not always — a car you need for work is functional, even if it depreciates. The trick is buying a reasonable car (used, reliable) at a reasonable rate, not the most you can 'afford' monthly.
What about 0% financing offers?
Genuinely 0% can be fine — but read the fine print. Many 'deferred interest' offers retroactively charge all the back interest if you miss the payoff window by a single day.
Should I invest while paying off debt?
If your debt rate is above ~7-8%, prioritize debt. Below that, it's reasonable to do both — especially if your employer matches a 401(k) (free money you shouldn't skip).
Is a mortgage always good debt?
Usually, since you're buying an asset that often appreciates. But stretching into a too-expensive house you can't afford turns it into bad debt fast. Keep housing costs under ~28% of gross income.
What about using a HELOC or home equity loan?
Depends on what you use it for. HELOC for home renovations that raise home value = potentially good. HELOC to pay for a vacation = classic bad debt at a better rate.
Is it bad to co-sign on someone else's debt?
Often, yes. If they default, you owe the balance AND it dings your credit. Only co-sign for someone whose finances you'd happily manage yourself.