Good debt typically refers to debt that helps you reach your financial goals—like owning a home, paying for school or starting a business. Debt might also be considered good if it helps you build credit.
But remember: Part of what separates good debt from bad debt is how it’s managed. This means using credit responsibly, like making monthly payments on time. Loans and credit cards can help open new doors and opportunities, but there are no guarantees. However, any debt you can’t pay back on time could end up being considered bad.
Examples of Good Debt
Here are a few types of debt that can be considered good debt under the right circumstances. Keep in mind, though, that any type of debt could potentially become bad debt in different circumstances—if you can’t repay it or it negatively affects your credit scores, for example:
1. Mortgages
Monthly mortgage payments build equity. And this could lead to a higher net worth. And interest paid on a mortgage can sometimes be tax-deductible.
2. Student Loans
Financing education can be necessary to get a degree, and a degree has the potential to increase earnings. Student loans typically have lower interest rates, compared to other lines of credit. Plus, the interest can be tax-deductible.
3. Small-business Loans
Taking on debt to start a business can be helpful for building wealth. But it’s a good idea to keep in mind the risks of starting a business before taking out a loan.
4. Personal Loans
A personal loan can be helpful for consolidating debt at a lower interest rate. And if it’s an unsecured personal loan, you may not need collateral—like your home—to secure the financing.
5. Credit Cards
With responsible use, credit cards can help build credit, which can help you do things like borrow money, get a credit card or rent an apartment. Making the minimum payment on your credit card over time may help keep your account current and in good standing.
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