Understanding Good Debt & Bad Debt

Hi there, accounting fans! This article was originally written here.

If you’re a regular reader of this blog, you already know we carry a very strong anti-credit banner.
But let’s be fair, not all of it is evil. Sometimes is actually good. Some can help you grow. And some…well, some will drag your wallet into a dark alley and mug it.

So what is debt? it is simply money you owe. From taking out loans to buy your first home, goods from a supplier and pay later? Debt. Tell your staff “Merry Christmas, I’ll pay you in January”? Also debt (and a good way to be unpopular).

In business, tiny debts pop up all the time. That’s why accountants separate:

• Current liabilities: short-term debts you’ll pay soon
• Non-current liabilities: long-term debts that take longer to clear

Okay, definitions done. Now let’s tackle the big question:

Good vs Bad Debt What’s the Difference?

What Is Good Debt? It helps you grow richer, financially or through productive assets. Good debt is money you borrow that makes you MORE money.

Example:
You take a mortgage on a house. Over time the property value goes up and you’re not paying rent anymore. You might even rent the place out someday!

What Is Bad Debt?

Bad debt is the villain of your financial story. Borrowing money for something that does NOT increase in value. Credit cards, buy-now-pay-later traps, high-interest personal loans and taking a loan to buy a luxury car. These are all examples of bad debts.

How to Maximise?

Here are some tips:

• Use Credit Wisely
  Borrow only for things that grow in value or generate income. Skip it for impulse buys, trendy gadgets, or things that will be worth half their price in 6 months.
  
• Shop for the Best Rates
  Debt is a product so shop like you would for a laptop or holiday deal. Better interest rates = more money saved.
  
• Attack High-Interest Debt First
  Have multiple loans and prioritise the ones that cost you the most. This saves you money (and a lot of stress) in the long run.

Debt isn’t going anywhere, it’s part of modern financial life. But how you use it is what determines whether it becomes your financial superpower or your financial kryptonite. Use it wisely!