Good debt vs bad debt, and how credit works

Debt is borrowed money you repay with interest — the lender's fee. Whether debt helps or harms depends on what it buys and what it costs.

"Good" vs "bad" debt

• Potentially good debt funds something that may grow in value or income: a mortgage on a home, or an affordable education loan. Interest rates are usually lower.
• Usually bad debt funds consumption that loses value, at high rates: credit-card balances, "buy now pay later", payday loans.

The dividing line is really the interest rate and whether the purchase builds or drains your net worth.

Why high-interest debt is so damaging

Credit cards can charge 20%+ a year. That's compounding working against you — few investments reliably beat that, so clearing costly debt is often the best "return" available.

Using credit well

• Pay cards in full each month to avoid interest and build a good credit history.
• Keep total borrowing comfortably within what your income can service.
• Attack the highest-interest balance first (the "avalanche" method).

Key takeaway

Debt is a tool. Cheap debt for appreciating assets can be sensible; expensive debt for everyday spending is one of the fastest ways to erode wealth. Clear the expensive kind before investing.