How to Tell the Difference Between Good and Bad Debt

Most Americans have a love-hate relationship with debt. We like using it to buy homes, buy cars, and pay for college. But we don't like feeling strapped by debt payments that leave us unable to reach critical goals, such as saving for retirement.   

According to the Federal Reserve, consumer debt was near $14 trillion after the second quarter in 2019, the twentieth consecutive quarter of debt increase in the U.S. That staggering number is the total of Americans' home, auto, student loan, and credit card debts. 

If you're struggling with how to prioritize debt or make payments right now, you're not alone. The key to digging out of debt is staying focused on wise solutions, not dwelling on problems.

One of the questions I often hear about getting out and staying out of debt has to do with setting priorities. Many people are confused about which debts to tackle first and whether it's smart to eliminate all debt. 

The best way to create a plan for getting out of debt is to understand the difference between good and bad debts.

The best way to create a plan for getting out of debt is to understand the difference between good and bad debts. Debt that allows you to make money or increase your net worth is good. But debt that causes you to lose money or net worth is terrible. 

For example, an affordable home mortgage is generally a good debt because it allows you to buy a home that may appreciate. An auto loan is generally a bad debt (even though it may be necessary for most people) because vehicles depreciate quickly and rarely make money for the owner. 

You get the idea. Going into debt for vacations, clothes, electronics, or furniture is not a wise investment in your future. Likewise, buying a home that's out of your price range is never wise. A good debt must be affordable in the first place. 

If you use debt to finance a lifestyle you can't afford, or if you're paying sky-high interest rates, it should be addressed sooner rather than later.

If you have debt, but also have plenty of savings and a steady income to cover it, it may never turn into a problem. But if you use debt to finance a lifestyle you can't afford, or if you're paying sky-high interest rates, it should be addressed sooner rather than later. 

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