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Is Debt Ever Healthy? How to Tell the Difference Between Good and Bad Debt

By Michael Nedreski

People take on debt for a wide range of reasons that may land anywhere on the spectrum between good and bad. However, the term "debt" usually carries a negative connotation since it brings up thoughts of financial struggle and the burden of repayment. 

But debt isn't always a bad thing. In some cases, it can be beneficial in creating a better future for yourself. In other cases, it could trap you in a seemingly endless cycle of borrowing and repaying. We'll share how you can tell whether a debt is healthy and the types of debt to avoid.

What Is Good Debt? 

The term "good debt" describes debt that has the potential to increase your net worth or improve your financial situation over time. Ultimately, the strategy behind that debt outweighs the cost of borrowing. This is ideally low-interest-rate debt with affordable repayment terms. 

This would be the case if your debt was used to purchase an asset that appreciates over time. It might also be considered good debt if it's used to invest in learning skills that could increase your income over time. 

Good Debt Examples

There are several affordable forms of debt that could help you increase your net worth or improve your finances. Here are three of the most common examples of good debt:

• Mortgages: A mortgage allows you to purchase a home that you likely wouldn't be able to pay for outright. A home is likely to appreciate in value, and interest rates are generally lower compared to other forms of borrowing. 

• Car loans: Having reliable transportation is a necessity for many people. If you don't have the cash on hand to buy a car, a car loan facilitates the purchase. It might enable you to take a higher-paying job or accept other income opportunities. Just be sure your car loan is affordable or it could easily qualify as a bad debt. 

• Student loans: Having a degree doesn't guarantee a high-paying job, but it does improve your chances of earning more over your lifetime. As of 2022, the Federal Reserve reports that recent graduates with a bachelor's degree earn a median of $54,000 compared to high school graduates earning a median of $34,320. 

What Is Bad Debt?

Bad debt makes your financial situation worse and is typically used to buy consumer goods or to purchase something that loses value over time. Bad debt typically carries high interest rates, fees, and even unreasonable repayment terms. It can become a financial nightmare if not managed properly. 

Since bad debt usually has a high interest rate and fees, it's easy for the compounding interest to snowball out of control and make repayment difficult. A quick way to tell a good debt from a bad debt is to ask yourself whether this will help you make more money in the future. 

Bad Debt Examples

There are several forms of borrowing that are considered bad debt. The only one that's ambiguous here is a personal loan. 

• Credit card debt: Most credit cards have high compounding interest that comes into play when you hold a balance month after month. If you have rates over 20%, it means you're paying significantly more for each purchase you've made on that credit card.

• Payday loans: This type of predatory debt is banned in many states. Payday loans often have interest rates of almost 400% paired with excessive hidden fees, which can make paying off your debt nearly impossible. 

• Personal loans: A "bad debt" personal loan would be one used to finance purchases such as a vacation, new furniture, or a new wardrobe—things that don't appreciate in value. However, a personal loan used to consolidate high-interest debt could be a good debt.

Is Having Debt Ever a Good Thing? 

So, is having debt ever a good thing? The answer is yes—but with some caveats. Certain types of debt can help you get ahead and build a greater net worth over time when managed well. Other forms of debt could create financial pitfalls that make it even harder to experience a life of financial freedom.

Having debt isn't inherently good or bad; it's about the type of debt you choose and how you manage it. Making smart borrowing decisions begins with paying attention to factors such as how much you're paying to borrow the money (interest charge), the purpose of the debt, and your ability to repay it.

Need Help Conquering Your Debt? 

It can feel overwhelming to have a large amount of debt hanging over your head. When you have goals of reaching financial freedom, it's important to work with a knowledgeable professional who can help you develop a strategy that addresses the good debts and any bad debts that are holding you back. We at White Oak Wealth Partners are here to help. To get started with a financial consultation, contact us by calling 814-835-4551, emailing MICHAEL.NEDRESKI@LPL.COM, or scheduling an appointment here.

About Michael

Michael Nedreski is managing partner at White Oak Wealth Partners, a specialized financial lifestyle and wealth management firm serving entrepreneurs, business owners, executives, and their families. Mike has 30-plus years of experience in the financial services industry and is committed to serving his clients through holistic financial planning, disciplined investment strategies, and proactive personal service. Mike and his team are continuously looking for innovative and proactive ways in which to serve their clients, acting as their independent wealth coach and personal CFO. 

A native of Erie, Pennsylvania, Mike began his career in the financial services industry in 1988. He has earned the Chartered Retirement Planning CounselorSM (CRPC®) conferred by College for Financial Planning and Life Underwriting Training Council Fellow (LUTCF) designations. Mike is also an active member of the Financial Services Institute (FSI) and Financial Planning Association (FPA).

When not working, Mike enjoys spending time with his wife, Amy, and their seven children. He volunteers in his community and at his church and his children's schools. An outdoors enthusiast, Mike loves hunting, fishing, golfing, and spending time near or on the water. He also enjoys working out and watching some of his favorite sports teams, the Pittsburgh Pirates and the Cleveland Browns. To learn more about Michael, connect with him on LinkedIn.