Many people will classify debt into two categories: good debt and bad debt. You may be wondering why they make this distinction. It is important to realize that debt may help you to achieve something better for yourself, and generally this is considered to be good debt. Bad debt does not do this.
Good debt is called good, because many people believe that the outcome justifies borrowing the money. One example of this is student loan debt. This debt helped to raise your income potential, which can justify the need to borrow the money. However, you still want to limit the amount of money that you borrow. You can sometimes roll bad debt into a student loan—you do not need to borrow enough to live an expensive and extravagant lifestyle.
Another example of good debt is a mortgage. You build equity in your home, and the money you pay towards the home can be seen as investment. Many people view renting an apartment as just throwing your money away, whereas you build equity when you purchase a home. So a first mortgage is generally considered good debt. However this too can turn into a bad debt decision. If you borrow too much for your home or cash in your equity to buy things right away then your mortgage debt is not a good debt.
Your choices of how your spend your money relate back to whether or not a debt is considered good or bad. It is important to remember that any debt that is excessive or used to purchase wants instead of needs should likely be avoided. Additionally just because the debt is good instead of bad, does not mean that you should borrow all of the money that is available to you. Use good judgement when you make decisions to borrow money.
Even if the debt is considered a good debt you should work to pay off your debts as quickly as possible. This will allow you to begin to build wealth. It can also help you pursue your dreams, because you will not be as dependent on your paycheck each month. There are many reasons to get out of debt.
