Not all debt is bad. That may seem jarring to some people, but it’s true. Businesses use debt all the time to growth their business and work their way to profitability. It’s no different in personal finances. 

What makes a debt good or bad has very little do with what kind of debt it is, whether it’s a credit card, student loan, car loan or mortgage. What makes it good or bad is how and why it’s used. 

Good Debt Defined

What makes debt ‘good’, from a purely financial perspective anyways, is if it is being used to generate more cash. Look at that debt as an investment. 

What is the investment and what is the expected return on investment? If you can answer that question, you can determine if a debt is good or not. 

For example, student loans could be considered good debt, since the idea is that you’ll get a degree that’ll ultimately get you a job. I’ll explain later why student loans can’t automatically be considered ‘good’ debt. But for now, you get the idea. You go into debt to get a degree and come out with a job with good future income prospects. 

Bad Debt Defined

On the other hand, maybe it’s easier to define what ‘bad’ debt is. Bad debt is when it is used for goods and services that are purely consumed without any expected financial returns. 

For example, you and your girlfriend go out to eat at an expensive restaurant and then go bowling and put it all on a credit card. Or maybe a more extreme example. You take a 3-week cruise around Europe and you put it all on a 20% APR credit card because you don’t have the cash to pay that trip off right away. That’s bad debt.  

There will be no financial return on that spending. It’s purely consumed.

Turning Bad Debt Into…

There are ways to turn really bad debt into not-so-bad debt. One way is to consolidate your debt with an organization like Lance Advisors. 

By consolidating, you can take your super high interest credit card payments and refinance them into something more manageable. Depending on what you spend it on, it may still be bad debt, but you chip away at the consequences of it by reducing your interest rates. 

Examples of Good Debt and Bad Debt

The following are some examples of good debt. Interest rates, terms and alternative sources of funding also play into this, but for now, let’s give you some simple examples. 

I already mentioned student loans because the idea is that it’ll help you get a higher paying job. Again, let’s talk about why that may not always be the case. 

If you go to a high-ranking public university and come out with $20,000 in student loans, that can be good debt if that gives you entrance into a career that eventually makes $100,000 or more. That is clearly good debt, and is seen as a wise investment in your future. 

According to research, bachelor’s degree holders make $32,000 more annually than non-degree holders. So, you can easily see how this is an investment. 

Another example is a mortgage. The fact is, you have to live somewhere. It’s either paying rent, which goes into a financial black hole, or you put it back into the equity in your home. 

Another example is a car. If you buy a reliable, reasonably priced car to get to and from work, that is good debt. If you buy a Maserati that you can barely make the payments on and you don’t have a job, that is bad debt. 

Even credit cards can be good debt. Let’s say you find a great opportunity to sell a certain kind of niche product and you can do it all online. 

You may use a high interest credit card to buy the initial pallets of product at wholesale. If you turn around and sell that inventory at a high margin and are able to pay back the credit card soon thereafter, that is good debt, even though it’s a credit card. 

Even if you rack up a high credit card debt, if it was to buy product that you’re selling for a profit, it can be good debt. That’s even more the case if you consolidate that debt with a group like Lance Advisors where you are also reducing your interest payments. 

I probably don’t even have to go into examples of bad credit card debt. These are debts accrued for purchasing concert tickets, fast food, or Netflix memberships. Any debt without an expected return is bad.

If you think about debt properly, it can work in your favor. But if you consistently go into bad debt, you’ll end up broke.