Rethinking good debt vs. bad debt

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For generations, financial professionals have expounded the virtue of understanding the difference between good debt and bad debt. This dichotomy has led to the notion that as long as it’s for a home, a college degree, a business or, some would even say a vehicle, going into debt is not a bad idea, but actually a “good” financial move.

Referring to “good debt” or to “bad debt” sounds like we are essentially assigning debt its own will to act well or misbehave. Consequently, if a borrower chooses to get into a “bad debt,” they can easily justify such a poor choice because in the end, the negative financial impact was the debt’s fault by its very nature of being bad, rather than their own individual poor choice.

It might be better to change the dichotomy of good debt vs. bad debt to the trichotomy of advantageous vs. practical vs. obstructive debt, explained below.

Advantageous debts: These debts are used to help us achieve something beneficial. Typically, these include:

  • Home loans, where the home is likely to appreciate more over time than the principle, interest and taxes paid on it.
  • Student loans, when the degree will produce greater lifetime income compared to the loans’ principal and interest charges.
  • Business loans, when the company is well-planned and managed, and the borrower is prepared to dedicate him or herself to the survival of the business.
  • Vehicle loans, when the vehicle allows the borrower to increase her earnings more than the loan’s principal and interest, as well as the vehicle’s insurance, maintenance, fuel and repair costs. Even then, considerations should be made for alternative transportation, including driving a currently paid-off vehicle, carpooling, vanpooling, public transportation, etc.

Practical debts: These debts usually would be the credit card debt paid off every month that doesn’t generate interest charges. While there may be frequent flier or rewards programs associated with credit cards, benefits can cancel out if spending gets out of control and leads to “obstructive debt.”

Obstructive debt: This refers to any loan product that incurs interest or fees for items negatively affecting financial goals and plans. Such debt can block the pathway to financial goals by diminishing funds through interest charges.

Debt is, after all, just a financial tool for us to use. Consider the humble hammer: The question of whether a hammer, as long as it is in good condition, is good or bad seems absurd, unless we ultimately ask ourselves what we want to do with it. Is it the right tool for the job at hand?

If we approach debt as a tool rather than as an anthropomorphic financial judgment call, we are much more likely to make informed choices that take into account our own personal financial situation and our financial goals and plans.

Editor’s note: Thanks to Todd Christensen, director of education,, for contributing this story.