With personal and household debt growing at ever increasing rates it is important that we take time to understand debt.  Many think all debt is bad and should be avoided or paid off as soon as possible.  But debt can be good or bad depending upon how it is used and its affect on your finances.  There are several key differences between good and bad debt.

Good Debt - debt from home mortgages, student loans, and business loans is generally considered good debt.  Some investment debt may also be considered good.  Good debt builds value over time.  Good debt also tends to offer some tax advantage and have a low interest rate.

Student loans typically have low interest rates and the interest is tax deductible.  Also, your salary or hourly wage is typically higher when you have a college degree.  Interest on home mortgages and real-estate investment loans is usually tax deductible and the property appreciates in value over time.  Business loans help purchase equipment and inventory necessary for a business to operate.  The interest on these loans can be written off as an expense.  A loan at a low interest rate to purchase an investment that returns a higher rate of return is also good.

Bad Debt - debt from purchasing items on credit that are consumed or depreciate over time is bad debt if the credit or loan is not paid in full when due.  Credit card debt, car loans, boat loans, personal loans, and department store lines of credit are all examples of bad debt. Bad debt typcially comes with high interest rates and offers no tax advantages.  The items purchased with bad debt has decreasing or no value over time.  Clothing can loose as much as 50% of its value as soon as you walk out of the store where you bought it.  Most cars loose 20-25% of their resale value when you drive off the car lot where it was bought.  Paying credit card debt or personal loans off over time can cost you 2-3 times or more what your original purchase cost. 

Be careful!  Borrowing more than you can afford is bad no matter what type of debt you acquire.  Good debt is bad if you cannot live within your means.  Bad debt is always bad and should be avoided or paid off as soon as possible.