Good debt vs. bad debt: how to tell them apart and use them in your favor

Not all debt is a problem: there is debt that builds wealth and debt that destroys it. The difference is not in the amount, but in what that money buys and at what rate. This is the guide to telling them apart.

The good debt

It finances something that increases your value or generates income:

• Education: a degree or course that improves your salary.
• Housing: a mortgage buys an asset that usually appreciates.
• Business: capital that produces a return greater than the loan’s cost.

The rule: if the asset rises in value or generates income, the debt can be smart.

The bad debt

It finances consumption that depreciates or disappears:

• Cards used for current expenses and “outings”.
• Loans to finance vacations, clothes or technology that devalues.
• Any debt at high rates that you pay with more debt.

The quick test

Before going into debt, ask yourself: will this generate money for me or just spending? If the answer is “just spending,” better save and pay in cash.

The key figure

The rate. The number separating the debt that builds you from the one that sinks you: always compare it with the return of what you buy.