Good Debt vs Bad Debt
Good debt builds wealth or income; bad debt funds consumption or depreciating items at high interest cost.
What is Good vs Bad Debt?
Good debt refers to borrowing that finances assets likely to appreciate in value or generate income over time — such as mortgages (real estate typically appreciates), student loans (higher earning potential), or business loans (return on capital). Bad debt typically refers to high-interest borrowing used to fund consumption, depreciating goods, or discretionary spending that produces no lasting financial return — such as credit card balances for lifestyle purchases or auto loans on rapidly depreciating vehicles. The distinction is not absolute: a mortgage becomes "bad" if the interest rate far exceeds investment alternatives, and student debt becomes burdensome if the degree does not improve earning capacity sufficiently to service the loan.
Example
A $30,000 student loan at 5% interest for a nursing degree that increases annual earnings by $30,000 represents good debt — the return on education investment is clear and rapid. By contrast, $8,000 in credit card debt at 24% APR accumulated on vacation spending generates no financial return and costs approximately $1,920 in annual interest, making it a textbook example of bad debt.
Source: Consumer Financial Protection Bureau — Managing Debt