Good Debt vs Bad Debt: What You Need to Know to Stay Financially Free

Let me tell you something—being in debt? Not my vibe. I personally hate it, especially credit card debt. That’s why about 10 years ago, I made a decision that changed my financial future: I paid off my credit card in full and closed it immediately. Since then, I haven’t opened a new credit card, and I don’t plan on doing so again. Credit cards can be a slippery slope, and I wasn’t about to let high interest rates eat away at my hard-earned money when I used to work at the time.

But not all debt is created equal. Some debt can actually help you get ahead in life, while other types will keep you stuck in the paycheck-to-paycheck cycle. Let’s break down good debt vs bad debt, so you can make the best choices for your financial future.

What is Good Debt?

Good debt is the kind that helps you build wealth or improve your financial position over time. It’s an investment in your future that can offer long-term benefits.

Examples of Good Debt:

• Student loans: Education can increase your earning potential, making this a good investment—if managed wisely. (I currently have $21,571.14 in student loan debt, and we plan to tackle it after we finish building our house in the Dominican Republic. Because for us, family comes first!)
• Mortgage loans: Buying a home can build equity and grow in value over time.
• Business loans: Taking out a loan to start or expand a business can lead to increased income and financial independence.

Good debt usually has lower interest rates and the potential for a return on investment. But it’s still debt, and it needs to be handled responsibly.

Ask yourself: Is this debt going to improve my financial future, or is it just adding unnecessary stress?

What is Bad Debt?

Bad debt, on the other hand, drains your finances without offering any real benefits. This type of debt is usually associated with buying things that lose value quickly or have high interest rates.

Examples of Bad Debt:

• Credit cards: They can be useful if you pay them off every month, but carrying a balance with high interest? No thanks. (Like I said, I closed mine 10 years ago and haven’t looked back!)
• Expensive car loans: Cars lose value fast. Our first car was a hooptie that we paid $1,700 for—no car payments, just a hefty insurance of $386 a month. But hey, at least we didn’t owe anyone for it!
• Personal loans for non-essentials: Taking out a loan for vacations, luxury items, or anything that doesn’t contribute to your financial goals.

Bad debt tends to keep you stuck in a cycle of monthly payments with little to no return.

How to Tackle Debt the Smart Way

If you’ve got debt—whether it’s good or bad—the key is to have a plan. Two popular methods to pay off debt are:

The Debt Snowball Method

Perfect if you love quick wins! Here’s how it works:

1. List all your debts from smallest to largest.
2. Focus on paying off the smallest debt first while making minimum payments on the rest.
3. Once the smallest is gone, roll that payment into the next debt on the list.

Why it works: It builds momentum and motivation as you see debts disappearing one by one.

The Debt Avalanche Method

If you’re all about saving money in the long run, this one’s for you.

1. List your debts from the highest to the lowest interest rate.
2. Pay off the highest interest debt first while making minimum payments on the rest.
3. Once the highest is gone, move to the next highest.

Why it works: You’ll pay less interest over time, which means more savings.

Which method fits your personality? Are you the type who loves crossing things off a list, or do you want to save the most money possible?

How to Avoid Bad Debt in the First Place

If you want to stay on top of your finances, avoiding bad debt is key. Here are a few ways to do that:

• Budget like a boss: Plan your spending with intention and make room for your goals.
• Save for big purchases: Instead of financing everything, start a sinking fund for major buys.
• Live below your means: Fancy cars and luxury items can wait—financial freedom is way cooler.

Think about it: Are your spending habits aligned with your long-term goals?

Final thoughts

When it comes to good debt vs bad debt, the key is knowing which type will move you closer to your financial goals.

For me, building our home in the Dominican Republic is a top priority, so we’re focusing on that before tackling my student loans. And when it comes to cars, we’ve always taken the route of buying used and avoiding monthly payments whenever possible.

Debt doesn’t have to control your life. Whether you’re using it as a tool for growth or working your way out of it, what matters most is having a plan and staying disciplined.

So, what’s your next financial move? Will you start tackling your debt today or rethink your approach to spending? The choice is yours!