What is Good Debt and Bad Debt?

Good and bad debtPeople often consider two main types of debt, known as good and bad debt. One general rule of thumb is that debt is good if it’s the type that nets you a tax deduction.

For example, running up $10,000 of debt on a credit card is bad debt. It’s something you simply owe with no benefits. Buying a home for $500,000 is good debt. It’s far, far more debt overall, but you can take a deduction on your taxes.

It also eliminates the need for rent payments and you’re slowly paying off a home that still has an inherent value. In some cases, the home will sell for more than you paid for it.

Another example of good debt is a business loan. They often say that you have to spend money to make money. You have to take that loan out to start your company, but you hope it becomes an asset that keeps earning you money, even after you pay off the debt. Again, you may also get a deduction.

However, experts warn that even “good” debt can turn bad. The deduction alone isn’t reason enough to take on the debt. If you can’t afford that $500,000 home, you’ll wind up in foreclosure. Yes, you get a bigger deduction than you would with a $200,000 home, but trouble can still mount. Additionally, taking on too many good debts, which may all have been fine on their own, can bury you in overall debt.

Did you perhaps take out a lot of debt that you thought was wise, but now you’re in over your head? It happens, and it’s not the end of the world. Just be sure you know about all of the debt relief options you have.