Good Debt vs. Bad Debt: How to Tell the Difference and Take Control

Not all debt is created equal. Some types can help you move forward in life, while others may hold you back. Knowing the difference between good debt and bad debt—and how to manage both—is the key to building long-term financial stability.

What Is Good Debt?

Good debt is money you borrow that helps you build wealth, increase your earning potential, or improve your quality of life over the long term. It often works for you by financing assets or opportunities that can grow in value or income potential. A mortgage can provide a home while building equity, education loans can open the door to higher-paying careers, and business loans can give entrepreneurs the chance to expand and thrive. Even an auto loan, when used responsibly, can be considered good debt if it allows you to maintain reliable transportation to work and meet daily needs.

Examples of good debt include:

• Home loans (mortgages): Build equity in a property while enjoying potential tax deductions on interest.
• Student loans: Fund education that increases your future income potential.
• Business loans: Invest in equipment, inventory, or expansion that can grow your business.
• Auto loans: Provide reliable transportation, especially if needed for work.

What is Bad Debt?

Bad debt, on the other hand, is money you borrow for expenses that don’t add long-term value and often come with high interest rates that make repayment difficult. Instead of building wealth, this kind of debt reduces your financial flexibility and can quickly spiral if left unchecked. Credit cards are one of the most common culprits—helpful when used wisely, but dangerous if balances carry over month to month. Payday loans and high-interest personal loans can be even more damaging, leaving borrowers stuck paying far more in fees and interest than they originally borrowed.

Examples of bad debt include:

• Credit cards with balances: Carrying over balances month to month adds up in interest and fees.
• Payday loans: Extremely high interest rates that can trap you in a debt cycle.
• Personal loans for non-essentials: Borrowing for vacations, shopping, or luxury items

Other Types of Debt

Not every loan fits neatly into the “good” or “bad” categories. Some debts fall into a middle ground where the impact depends on your unique financial situation, the interest rate, and how you manage repayment.

• Medical debt: Often unplanned, medical expenses can create significant balances. While necessary, they don’t provide long-term financial benefit, so repayment strategies and assistance programs are key.
• Home equity loans and lines of credit (HELOCs): These can be useful for consolidating higher-interest debt or funding improvements that raise your home’s value. However, they put your home at risk if payments aren’t made. 
• Consolidation loans: Combining multiple debts into one payment at a lower rate can help, but only if it’s paired with better spending habits. Otherwise, you could end up in more debt over time.

Types of Debt at a Glance

How to Get Out of Bad Debt

1. Tackle High-Interest Balances First

One of the most effective ways to pay off debt is to focus on your highest-interest balances first (often called the avalanche method).

• List your debts from the highest interest rate to the lowest.
• Make minimum payments on all accounts.
• Put any extra funds toward the highest interest balance.
• Once that balance is paid off, move to the next one on your list.

This approach saves you the most money over time. Be patient—it may take months or even years, but by eliminating the most expensive debt first, you’ll reach debt freedom faster and at a lower cost.

2. Consider a Balance Transfer

If you qualify, transferring a balance to a card with a zero or low interest-rate for the first year or 18 months could be another way to pay down debt while pausing those high-interest charges.

• Apply for a credit card with a 0% or low introductory interest rate.
• Transfer your high-interest balances to the new card.
• Pay as much as possible during the promotional period.
• Set reminders so you never miss a payment.

Missing even one due date can cancel your low rate and add fees, so this strategy works best if you’re disciplined about on-time payments.

3. Call Your Lender to Discuss Options

Sometimes, lowering your interest rate can be as simple as asking. Credit card issuers and lenders may be willing to help—especially if you’ve been a good customer.

• Gather your account information before calling.
• Ask if you qualify for a lower interest rate or different repayment options.
• Be polite and explain your goal of paying off debt responsibly.

You won’t know unless you ask, and many lenders are open to working with proactive borrowers.

Repaying Education Loans

Do you have student debt that feels overwhelming? Unlike credit card balances, education loans come with unique repayment options and considerations. Our article on Strategies for Managing Student Loan Debt explores modern approaches that can help you manage payments more effectively and work toward financial freedom.

Bringing It All Together

The right kind of debt can help you build a brighter financial future, while the wrong kind can add stress and cost you money. The key is knowing the difference—and having a plan to manage what you owe.

At Forward Bank, we’re here to help you borrow wisely, manage debt effectively, and move your financial goals forward.