How Can I Tell the Difference between Good Debt and Bad Debt

by Jeff C. Johnson

Many people in modern America fall deep into a debt hole. And it can take years to climb out of that hole.

It would be nice to never have to borrow money, but it’s probably not practical for most of us. That being reality, it’s important to understand the difference between good debt and bad debt.

Good debt is used to buy something of value that will increase in price. (Such as a home or other real estate investment.) Good debt provides income (a business, for example). And it somehow creates more value than the cost of the interest charged. (Such as money borrowed for education or specialized training.)

Good debt is usually lower cost because it is well secured with valuable assets. The interest is often tax-deductible, reducing the net cost of the loan.

Bad debt is the opposite.

It is used to buy something of declining value or no value at all. Financing a furniture purchase or using a credit card to pay for an exotic vacation, for example. The interest is often high because the security is thin or nonexistent.

And unfortunately, that steep interest is rarely tax-deductible.

Knowing which kind of debt you’re involved in will help you understand how best to get out of it. And getting out of that hole is the ultimate financial goal.

Learn more about good debt and bad debt in my new book, One Decade to Make Millions, available on Amazon and this website.