People love to say "all debt is bad," but that is too blunt to be useful. A mortgage and a payday loan are both debt, and treating them the same will lead you to bad decisions. Here is a cleaner way to judge any loan.
The core question
Good debt helps you build something that grows in value or earning power. Bad debt pays for things that lose value the moment you buy them, usually at a high interest rate. Ask one thing: is this borrowing likely to leave me wealthier or just poorer with more stuff?
Typically good debt
- Mortgages — buy an asset that often appreciates, at relatively low rates.
- Reasonable student loans — fund earning power, when the degree pays off.
- Small business loans — fund something designed to generate income.
Usually bad debt
- Credit card balances carried month to month, at 20%+ interest.
- Payday and title loans, with effective rates that can exceed 300%.
- Financing depreciating wants you cannot otherwise afford.
The 60-second test
Before borrowing, run three checks. First, the interest rate: under 7% leans good, over 15% leans bad. Second, the asset: does it grow or shrink in value? Third, the payment: can you cover it comfortably if your income dipped 20%?
Even "good" debt turns bad if the payment strangles your budget. Context matters more than the label.
A note on credit cards
Cards are not inherently bad. Paid in full every month, they are a free tool that builds your credit history. The danger is only the carried balance and its interest.
Your next step this week: list every debt you have with its interest rate, and circle anything above 15%. That circle is your payoff priority.