What Is Good Debt?

The words “good” and “debt” never belong in the same sentence — right? Actually, that’s not the case. The truth is that there is such a thing as good debt, and it can have an important impact on your financial future if you know how to use it. 

Here’s what to know about good vs. bad debt and how to make savvy money decisions. 

Good debt vs. bad debt

Although any kind of debt is technically money you owe, the main difference between “good” and “bad” in this context is the opportunity to make more money. What does that mean? Here’s a closer look:

Bad debt 

Bad debt is perhaps the most familiar kind of debt — the kind everyone thinks of when they hear the word. That’s because bad debt is all around us: Credit cards, car loans and anything with an exceedingly high interest rate. 

Generally speaking, this kind of spending is defined by depreciation. You’re putting money into an item that earns nothing and, in fact, loses value over time. While there are some technical exceptions — like a credit card that earns cash back or a car you use for your small business — it’s easiest to view this as bad debt because it costs more than it returns.

Good debt

Good debt isn’t exactly the opposite of bad debt. After all, it’s still debt — but the difference is that you’re putting money toward something that could bolster your financial standing in the future. If it generates income, improves your net worth or otherwise bumps up that bottom line, it might just be good debt.

Take, for example, real estate. Buying a home or rental property is often considered good debt because this kind of real estate can build equity and count toward your overall assets, which helps balance out your net worth.

Tips for managing good debt

It can be tricky to identify good debt in the real world because different spending opportunities come with different variables. Here are a few things to keep in mind:

#1: Always check interest rates

Even good debt can become bad if the interest rate isn’t on your side. Say you buy a house in an unfavorable market and agree to a high interest rate. Although you get an asset — your new home — you may end up paying more than you could make in equity. 

#2: Think ahead — way ahead

Student loans are an interesting example of good debt. Although they can be difficult to pay off, they may set you up for future career and financial success. The key is to look past what you’re paying right now — and even several years later — to see what any kind of debt might do for the rest of your life.

#3: Use investment approaches

In many ways, good debt is an investment — which means it can be managed in many of the same ways. Brush up on best practices for investing, then apply these to good debt opportunities to help you make informed, confident decisions.

Have more questions about debt management? Contact a Vectra Bank professional today for all the help you need.