Good Debt - Is There Even Such a Thing?

Even though most people are struggling under the burden of their debt, not all debt is that bad. Ideally, it would be better to have no debt at all, but since for many of us it is almost impossible, we need to determine the difference between bad vs good debt and try to eliminate the bad as soon as possible.

So what is good debt?

Experts say that good debt is the debt that creates value, an investment debt. For example, if you are taking a student loan, you are hopefully not just doing it to get out of your house and get to whatever college with no concrete plans for the future. Hopefully, you are taking a student loan, so you can get an education and make more money later. Borrowing money for an education is considered to be good debt, because you are investing money in your future.

Another example of good debt is your mortgage. Unless you are a millionaire, the chances that you can pay cash for a new home are close to zero. You do need a place to live and unfortunately you do have to borrow money to purchase a home.

A mortgage is considered to be good debt, because mortgages tend to have lower interest rates, which are tax-deductible. So even though you are borrowing money, you are getting a tax advantage and can write off interest on an asset that’s appreciating over time.

Another debt which is considered to be good is a business loan or an investment loan. Just like with a college education, if you are borrowing money with the intention to make money later on, this debt is not bad and is often necessary.

Some experts say that pretty much every debt which is tax deductible is good debt and every debt which is non-tax deductible is considered to be bad. It is important to know that some non-tax deductible debts such as credit card debts can be transformed into tax-deductible debts such as home mortgage debts. Talk with your financial advisor about refinancing and see if you can put yourself into a lower tax bracket.

Keep in mind that your credit report does not distinguish between good vs bad debt and no matter how good your debt is, you will still have to pay it off. Many students for example take a bunch of loans simply because they are eligible for them and because they were told that these loans are considered to be good debt. Later they end up spending years paying off the debt which they didn’t really need.

If you only have good debt left, you should not stop paying it off as soon as possible. Debt, whether good or bad, is still debt and if you are overloaded with it, it will continue hurting your financial health. Debt is the money that you owe and that you are paying interest for. The sooner you pay it off, the less you would have to pay in interest.