Is there such a thing as good debt?

Resources · Debt basics · 4 min read Building

Key points

• “Good debt” usually means borrowing for something expected to grow in value or raise your income.
• The label is a rough shortcut. The cost, the risk and your own situation matter more.
• The same kind of debt can work out well for one person and badly for another.
• A few plain questions let you judge any debt on its own terms.

Where the idea of good debt comes from

You’ll often hear debt sorted into two piles.

“Good” debt is borrowing for something expected to rise in value or lift your income over time. Home loans, study loans and loans to start a business get held up as the usual examples.

“Bad” debt is borrowing for things that lose value or get used up, often at high interest. Think credit card balances for everyday spending, or loans for things that quickly lose value.

There’s something to it. Borrowing for something that may be worth more later isn’t the same as borrowing for a meal out. But the labels hide about as much as they show.

Where the good debt label falls short

The value isn’t certain

Homes can fall in value as well as rise. A qualification doesn’t always lead to higher pay. Businesses fail. Call a debt “good” and it starts to sound safer than it is.

The cost still matters

A loan for a sound purpose can still be expensive. Here’s the same $20,000 borrowed over 60 months at two different rates. Interest is charged monthly at the APR ÷ 12, on the balance before each payment, and the last payment is whatever clears the balance. The same maths works in any currency.

Same amount. Same purpose. Same term. The higher rate costs $7,272.68 more. And the label “good debt” tells you nothing about which of these two you’re holding.

It depends on the person

A home loan with payments that fit comfortably is a very different thing from one that leaves no room for anything else. A study loan for a course you finish isn’t the same as one for a course you walk away from. Same category. Different outcome.

“Bad” debt isn’t always a failure

People borrow on cards to cover emergencies, gaps in income, medical costs, car repairs. That’s not a moral failing. Often it was simply what was available at the time. Calling it “bad” piles on shame and doesn’t help you pay a cent of it.

Questions that matter more than the label

Forget the two piles for a moment. Ask these about each debt instead:

1. What does it cost? The interest rate, the fees, and the total you’ll repay over the full term.
2. Does the payment fit? Can you cover it alongside your everyday costs, with something left over?
3. What’s at stake? Is it secured against your home or car? What happens if your income drops?
4. What does it pay for? Something that may hold or grow in value, something that may raise your income, or something used up quickly?
5. How long will it last? A debt that outlives the thing it paid for can feel heavy.

They work on any debt, whatever someone calls it.

Putting it into practice

When you list your debts, write down the cost and the purpose of each one, not just the balance. It helps you see which ones you’d most like gone.

Then there’s the order. Some people clear the most expensive debt first because it saves the most interest. Others start with the smallest balance for a quick win that keeps them going. There’s a real trade-off here, and neither is the only sensible choice (snowball or avalanche lays out both). Your numbers and your motivation decide it.

Some people keep a low-rate debt, like a home loan, ticking along on schedule while they throw everything at the higher-rate ones. Others want every debt gone, whatever the rate, for the peace of mind. Both are reasonable.

If any of your debts have grown past what you can manage, free debt help is available, and it’s confidential.

Common questions

What is considered good debt?

Usually borrowing for something expected to grow in value or raise your income, like a home loan, study loan or business loan. But it’s a rough shortcut. The cost and the risk still matter.

Is a home loan good debt?

It can work out well. But homes can fall in value, and payments that leave no room for anything else are a different story. It depends on the cost, the risk and your situation.

Is credit card debt always bad debt?

It isn’t a moral failing. People often borrow on cards to cover emergencies or gaps in income. What matters more is what it costs and whether the payment fits.

Try it

Compare the total cost of any loan at different rates and terms with the loan repayment calculator. To see all your debts on one timeline, find your Freedom Date.

General information only, not financial advice. Your situation is your own.