Is Some Debt Worse Than Others?
What makes debt good or bad? Learn about different types of debt, and find tips for managing and paying off debt responsibly.
Good debt is low-interest debt that improves your quality of living or net worth. But even good debt can get out of hand.
When choosing which debt or loans to pay off first, consider the interest rate and balance owed before you make a decision.
Debt doesn’t have to keep you from investing, if long-term returns could potentially outpace your debt’s interest rate.
You may have heard the term “no debt is good debt,” but is that true?
Most of us don’t have the cash to make large purchases, and some debt is inevitable for many. That’s why some people make a distinction between good debt versus bad debt.
Learn the difference between good debt versus bad debt, what debt to pay off first and why you shouldn’t neglect other financial goals during your debt repayment journey.
What Is Good Debt?
Generally, good debt is low-interest debt that ultimately improves your quality of living or net worth. Examples of good debt include:
While the above examples are generally considered good debt, remember that having too much debt, even “good debt,” can be problematic. Buying an expensive home or car that you can’t afford or having a student loan payment that significantly impacts your discretionary income can be just as bad as “bad debt.”
What Is Bad Debt?
Bad debt is generally high-interest or variable interest rate debt and oftentimes tied to a “want” rather than a “need.” Sometimes, bad debt starts as good debt, but due to overspending, it gets out of hand.
Bad debt could be tied to discretionary or irresponsible spending—making purchases that depreciate, don’t help you earn more or don’t improve your quality of life in the long run.
Bad debt typically includes:
It’s important to understand the reasons for taking on debt and working to keep it under control. Taking on any debt and letting it get out of hand can impact long-term savings goals.
What Do I Pay Down First?
Deciding what debt to pay down first hinges on a few factors:
Whether you’re paying down debt alone or as a couple, take the time to look at the big picture to get a clearer understanding of which to prioritize.
Don’t Let Debt Keep You From Investing
Carrying debt of any kind can feel like a burden. Some debt may be unavoidable, especially when it comes to improving quality of life through owning property or getting an education.
Remember, with good debt, when the interest rate is low enough, you may be better off paying the minimum right now and putting additional funds toward investment and retirement. Consider that since the beginning of the stock market over 220 years ago, stocks have consistently returned an average of 6.5 to 7.0 percent per year after inflation.1 If your “good debt” has an interest rate below those returns, it may be beneficial to invest some cash rather than rushing to pay down low-interest debt.
“Markets will be markets: An analysis of long-term returns from the S&P 500,” McKinsey Insights. McKinsey & Company, August 4, 2022.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.