Debt is something to be avoided at all costs, but not all debt is bad. Some types of debt can help you build wealth, secure better financial opportunities, and improve your quality of life. The key is knowing the difference between good debt and bad debt—and how to manage both wisely.
This guide explains what separates good debt from bad debt, provides real-world examples, and offers strategies to make debt work for you rather than against you.
Good debt is money borrowed for investments or expenses that have the potential to increase in value or generate long-term financial benefits. It helps you build assets, improve your earning potential, or create financial stability.
Buying a home is one of the most common examples of good debt. Property values tend to increase over time, meaning a mortgage allows you to build equity while avoiding rising rental costs.
Example: If you buy a home for $700,000 with a mortgage, and in 10 years it’s worth $900,000, you’ve gained $200,000 in equity—all while making repayments on an asset that is increasing in value.
Education is an investment in your future earning potential. Tertiary qualifications can lead to higher salaries, better job stability, and increased career opportunities.
Australia’s Higher Education Loan Program (HELP) allows students to defer tuition payments and repay them gradually through the tax system once their income exceeds a set threshold ($51,550 in 2024-25). Since the debt is indexed to inflation rather than accumulating interest, it’s one of the least harmful forms of borrowing.
Example: A university degree in finance, healthcare, or IT can boost lifetime earnings by hundreds of thousands of dollars, making HELP debt a worthwhile investment.
If used wisely, borrowing money to start or grow a business can generate significant returns. Business loans help finance inventory, equipment, or expansion, allowing business owners to increase revenue.
Example: A café owner borrows $50,000 to upgrade kitchen equipment, which improves efficiency and boosts profits. Over time, the increased revenue offsets the loan, making it a smart investment.
Borrowing to invest in shares, managed funds, or property can be considered good debt if the potential returns outweigh the cost of borrowing.
Example: If you take out a margin loan to invest in high-dividend stocks and the returns exceed the interest costs, you can generate passive income while building wealth. However, investment loans carry risk, so financial advice is essential.
Bad debt is money borrowed for depreciating assets or non-essential expenses that don’t generate long-term financial benefits. It often comes with high interest rates and can trap borrowers in a cycle of repayments.
Credit cards can be useful when managed responsibly, but carrying a balance leads to high interest rates (typically 18-22%), making it difficult to repay.
Example: If you have a $5,000 balance on a card with 20% interest and only make minimum repayments, you could end up paying over $10,000 in total.
Payday loans charge extremely high fees (up to 48% annual interest), making them one of the most dangerous types of debt. Many borrowers take out additional loans to cover previous ones, leading to a debt spiral.
Example: Borrowing $500 from a payday lender could result in repaying over $1,000 within a few months.
A car loan isn’t always bad, but financing an expensive vehicle you don’t need can hurt your financial health. Cars lose value quickly, meaning you’re paying interest on a depreciating asset.
Example: Buying a $60,000 SUV on finance when a $25,000 car would serve the same purpose means paying thousands more in interest on a rapidly depreciating asset.
How to Avoid It:
Services like Afterpay, ZipPay, and Klarna can encourage overspending. While they don’t charge interest, late fees add up quickly, and missed payments can impact credit scores.
Example: Splitting $1,200 worth of clothing into instalments may seem manageable, but it can snowball into multiple BNPL debts, creating financial strain.
| Factor | Good Debt | Bad Debt |
| Purpose | Builds wealth or increases earning potential | Spent on depreciating assets or non-essential expenses |
| Financial Benefit | Can generate returns (equity, income, education) | Often results in long-term financial strain |
| Interest Rates | Lower rates, often tax-deductible | High interest rates, compounding quickly |
| Examples | Home loans, education loans, business loans | Credit cards, payday loans, unnecessary car loans |
Even good debt can become bad debt if mismanaged. Here’s how to ensure debt works for you, not against you:
Lenders may approve you for more than you actually need. Use a loan calculator to determine what you can realistically repay.
High-interest debts like credit cards should be repaid before focusing on lower-interest loans. The avalanche method (paying off highest-interest debt first) is often the most effective strategy.
A mortgage, education, or business loan can improve financial stability, whereas borrowing for designer clothes, gadgets, or luxury cars can lead to financial stress.
Having 3-6 months’ worth of expenses saved can prevent the need for high-interest borrowing in emergencies.
Check your debts and interest rates every few months to see if refinancing, consolidating, or extra repayments could save you money.
Final ThoughtsDebt itself isn’t the enemy—it’s how you use it that matters. Good debt can help you achieve long-term financial success, while bad debt can drag you into financial hardship. The key is intentional borrowing—using credit as a tool to build wealth and financial stability rather than funding unnecessary spending. By understanding the difference between good and bad debt, you can make smarter financial decisions and set yourself up for a more secure future.
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