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Good Debt Vs. Poor Debt Be aware of the distinction
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Good Debt vs. Poor Debt Be aware of the Difference
Good debt can help you reach your goals, whereas bad debt is costly and could cause them to fall off.
Written by Sean Pyles Senior Writer | Personal finance, financial debt Sean Pyles leads podcasting at NerdWallet as the host and producer of NerdWallet's "Smart Money" podcast. On "Smart Money" Sean talks with Nerds on NerdWallet's NerdWallet Content team to answer listeners' questions about personal finance. With a focus on shrewd and practical advice on money, Sean provides real-world guidance that can help consumers better their financial lives. In addition to answering listeners' financial questions on "Smart Money" Sean also interviews guests outside of NerdWallet and also creates special segments that explore subjects like the racial inequality gap, how to start investing and the history of college loans.
Before Sean was the host of podcasts at NerdWallet He also covered issues related to consumer debt. His work has appeared on USA Today, The New York Times as well as other publications. When when he's not writing about personal finance, Sean can be found playing in his garden, going for runs and taking his dog for long walks. Sean is located in Ocean Shores, Washington.
Updated February 21, 2023
Edited by Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, debt and money management Kathy Hinson leads the Core Personal Finance team at NerdWallet. Prior to joining NerdWallet, she worked for 18 years at The Oregonian in Portland in roles including copy desk chief and team leader for design and editing. Her previous experience includes news and copy editing at several Southern California newspapers, including the Los Angeles Times. She received a bachelor's degree in mass communication and journalism at Iowa's University of Iowa.
A majority of the products we feature are from our partners who compensate us. This impacts the types of products we review and where and how the product is featured on a page. However, this does not affect our assessments. Our views are our own. Here is a list of and .
Before taking on any kind of debt, think about whether a car loan or a new credit card will help meet your financial goals -- or hinder them to reach. The debt you commit to and the amount and cost, can be the difference between good debt and bad debt.
Credit cards, for instance, could be an effective way of financing big expenses and earning reward points. However, if it is not managed properly and with care, credit card debts with high interest could get out of hand.
Here are some general guidelines for good debt and bad debt and the best way to handle it if you're facing too much debt.
What is good debt?
A low-interest loan that can help increase your earnings and net worth can be an example of good debt. However, too much of any kind of debt -- regardless of the potential it may create could result in bad debt.
Medical debt, for example, doesn't neatly fall into either the "good" and "bad" debt class. It's a cost that is largely uncontrollable and often doesn't have any interest. You have .
Student loans
In general, considered to be an investment in your future as a way to invest in your future, student loans tend to be lower in interest rate, specifically if they're government student loans.
Guideline: In general, try to have your student loan payment to stay below 10% of the expected after-tax income per year following graduation. If someone is expecting to earn $50,000 a year, the maximum amount of borrowing would be $29,000.
Do something about it: If you are facing overburdened student loans consider options the possibility of refinancing or the repayment plan that is based on income.
Mortgages
Most likely to be the most important financial decision you'll make, a loan is the way to homeownership.
Guideline: Know before shopping and limit your mortgage loan to 36% of your earnings.
Take action: Downsizing, or moving to a cheaper area can make housing costs easier to manage.
Car loans
For many, a car is essential for everyday life.
Guideline: Keep total auto costs, including your car loan payment, . The loan term must be 4 years or less, but usually with an initial 20% deposit.
Take action: or trading in your car for a more expensive one can help you manage costs for your car.
Track your debt the easy method
Sign up to NerdWallet to see your current debt breakdown and future payments all in one spot.
What is a bad debt?
The burdensome debts that eat away at your financial standing are classified as bad debt. Examples include debts with higher or variable rates of interest in particular when employed for discretionary expenditures or items that are devalued.
Sometimes bad debts are bad debts that have gone wrong. The credit card is an example of this: If you own a high-interest credit card and pay down your balance every month, it's fine. But if high-interest credit card debt builds up, you could be in danger.
Credit cards with high interest
High interest rates, such as those greater than 20% can make your debts more expensive.
Guideline: If you're not making progress on paying off your debts with credit cards, regardless of making sure you pay it all every month, it could be a sign you're facing issues .
Take action If you're able to maintain your spending in check Consider a plan which is where you settle your most smaller debts first. It can make your credit card debt more affordable, though you'll need good credit to be eligible for. In other cases, a nonprofit credit counseling agency may be an option.
Personal loans for purchases that aren't a necessity
Involving in debt to pay for expenses like a trip or brand new clothes could be an costly habit.
Guideline: Personal loans can be a viable option if you have a specific purpose in mind, like .
Take action: If you're facing an expensive personal loan and you're not sure if you're able to .
Payday loans
They are a type of debt that can turn toxic: They typically have interest rates of up to 300% that can make them unaffordable immediately. These are small-sized, short-term loans meant to be repaid with your next paycheck.
The guideline is that financial experts advise against payday loans because borrowers can easily fall into a debt cycle.
Take action: Consider alternatives such as taking out a loan from the credit union or asking family members for help.
The author's bio: Sean Pyles is the executive producer and host of the NerdWallet's Smart Money podcast. His writing has appeared in The New York Times, USA Today and elsewhere.
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