Good Debt vs. Bad Debt

"Debt" isn't one single problem — a mortgage at 6% and a payday loan at 300% APR are not remotely the same thing, even though both show up as "money you owe." Learning to tell them apart is the first step to fixing a debt problem instead of just feeling bad about it.

What makes debt "good"

Good debt generally has three things going for it: a relatively low interest rate, it's tied to something that builds value or income over time, and the payments are predictable. Common examples:

• Mortgages — you're building equity in an asset, and rates are typically far lower than unsecured debt.
• Federal student loans — they fund future earning power, often carry fixed, moderate rates, and come with borrower protections like income-driven repayment.
• Business loans used to grow revenue-generating equipment or inventory.

"Good" doesn't mean "no downside" — it means the debt is working for you more than it's working against you.

What makes debt "bad"

Bad debt usually funds things that lose value immediately, at rates that make it very hard to get ahead. The clearest example is credit card debt: the average card APR sits well above 20%, and it's financing purchases — clothes, dinners, gadgets — that are worth nothing by the time you've paid them off. Other examples:

• Payday loans — extremely short terms with fees that annualize into triple-digit interest rates.
• High-rate auto title loans and rent-to-own financing.
• Store financing with deferred-interest clauses, where missing the promo window retroactively charges interest from day one.

The gray area

Some debt doesn't fit neatly into either box:

• Car loans — a reasonably priced, reasonably rated car loan for reliable transportation to work is defensible. An oversized loan on a car that eats 20% of your take-home pay is not.
• Private student loans — often have higher, sometimes variable rates and fewer protections than federal loans, so treat them more cautiously.
• Medical debt — not "bad" in the sense of a poor choice, but usually 0% interest if you're on a provider payment plan, so it's rarely the debt to prioritize paying off early.

Why this distinction matters for your payoff plan

When you get to the next module and choose a payoff strategy, this categorization is what decides your order of attack. As a rule of thumb: knock out high-rate, no-upside debt (credit cards, payday loans) first and fastest, while low-rate debt tied to an appreciating asset or your earning power (mortgage, federal student loans) can often be paid down on a normal schedule while you invest or save in parallel.