Good Debt vs. Bad Debt: When Borrowing Builds or Breaks You

Not all debt is created equal. Good debt is money you borrow to buy something that grows in value or earns you income — an asset that should be worth more, or pay you more, than the loan costs. A mortgage on a home, a student loan that lifts your earning power, or a loan for a small business are classic examples. The borrowed money is doing productive work.

Bad debt is money borrowed to buy things that lose value or simply get consumed — a restaurant meal, a vacation, or the latest phone put on a credit card and not paid off. The purchase is gone or shrinking while the debt lingers. What makes it worse is the interest rate: U.S. credit cards averaged around 21–22% APR in recent years, far above what most investments earn.

Here's where an earlier idea bites back. Recall compound interest — the snowball that grows your savings? On debt, that same snowball rolls against you. Carry a $2,000 credit card balance at 22% and pay only the minimum, and interest piles onto interest; you can end up paying hundreds in interest and take years to clear it. The lender is earning the compounding that could have been yours.

The practical rule: borrow for things that build wealth or income, and be ruthless about avoiding — or quickly killing — high-interest consumer debt. A useful test is comparing the interest rate to what your money could otherwise earn. Paying off a 22% card is a guaranteed 22% return, better than almost any investment.