A Lesson About Debt: Good vs. Bad

In light of Black Friday and Cyber Monday, we want to make sure you understand debt. In general, LearnVest wants you to be wary of debt. However, you should know that there are different types of debt and that not all debt is considered equal.

Good Debt

This is the money you borrow to pay for something you expect to increase in value over time. Take property, for example. If you hold onto it for long enough, your house will most likely sell for a higher price than the one at which you bought it. And, the profit you make by selling it should make the interest you paid on the loan worthwhile. Another example of good debt is the debt that pays for your education after high school. A higher degree should increase your future income potential, making the interest that you pay on the student loans worthwhile, as well.

Bad Debt

This is the money you borrow to pay for something other than an asset that’s likely to increase in value. Credit card is the prime example. (Yes, that round of mojitos you bought with your credit card on Thanksgiving eve is most definitely bad debt. And, no, it doesn’t matter that it earned you enough airlines miles to go to Brazil.) A form of bad debt that most people find surprising? A car loan. After you buy it, a car’s value doesn’t appreciate. Instead, it goes in the opposite direction.

Knowing the difference is critical to making smart decisions. To learn more, take LearnVest’s Credit Quiz.