Good Debt, Bad Debt

It’s often smart to borrow to boost your income and your assets.

- KAITLIN PITSKER

WITH U.S. HOUSEHOLD DEBT AT A RECORD breaking $14 trillion at the end of 2019, more Americans are learning to live with and manage debt. Since the financial crisis, consumer credit in its many forms—from student loans and mortgages to auto loans and credit cards—has grown. In recent years, a strong economy and job market have encouraged many people to spend and borrow more.

Not all debt is harmful to your financial health. In fact, many people divide borrowing into good debt and bad debt. Good debt is used to finance goals that will increase your net worth, such as earning a college degree (see “Ahead,” on page 12), buying a home or owning a small business. Good debt is even better if it carries a low interest rate and is tax-deductible. Bad debt is money borrowed to buy things that won’t last or that you can’t afford, such as a Coach handbag that you charge to your credit card but don’t pay off, or a trip to Cozumel that you finance with a home equity line of credit or personal loan.

Sometimes the boundaries between good and bad debt aren’t as clear. Many experts consider loans for cars or other depreciating assets to be bad debt. But if you take on debt to buy or repair a car you need to get to work or to pay for a necessary medical expense, that debt falls somewhere between good and bad, says Michele Cagan, a certified public accountant and author of Debt 101.