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One of the more interesting concepts in debt management is that of “good” debt and “bad” debt. The good news is that a home mortgage is considered good debt. But if you are not careful, even good debt can go bad.

What is bad debt?

To know the good from the bad, it helps to first understand what bad debt is. Simply put, bad debt is debt that returns nothing to you. Credit card debt, in which you constantly carry balances, is bad debt. Payday loans and their ilk, along with most other consumer debt is bad debt. A car loan can be bad debt if the car is more than you need, or if you can’t afford it. Even when you can afford it, it is hard to put a car loan in the good debt category, since it depreciates in value every year, and you only a recover a small portion of what you paid in.

What is good debt?

Good debt is debt that can be leveraged into something more valuable. Carefully considered student loans, which can result in higher paying jobs, can be good debt. A home mortgage allows you to acquire an asset that you can sell later, and so is good debt. Business loans can also be considered good debt.

When good debt goes bad

Unfortunately, many people rationalize getting into more debt than they can handle by saying it is “good.” The truth is that debt is debt, and even good debt can turn into a nightmare. Many people get a bigger home mortgage than they can afford, turning that good debt into debt that should not be. Then they lose everything, including the money they have already paid, and they have no asset to show for it.

Before you get into debt for any reason, carefully consider your options. You should always try to limit the amount of debt you have, even if it is “good,” and especially if it is “bad.” And always try to pay off all of your debt as soon as possible.

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credit card debt, pay off debt