Good Debt vs. Bad Debt - Types of Good and Bad Debts (2026)

Experts break down the differences between debt that can improve your finances and debt that can cause financial stress.

Apr. 12, 2026 at 8:36am

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An extreme close-up of a shiny, heavy metal gear mechanism with cogs and levers, representing the complex financial infrastructure that underpins household debt.An intricate web of institutional banking machinery illustrates the complex financial systems that both enable and constrain household debt.NYC Today

The article explores the concept of 'good debt' versus 'bad debt', providing examples and guidelines to help readers understand the differences. It discusses how mortgages, student loans, and small business loans can be considered 'good debt' that can increase one's net worth or provide future value. In contrast, the article identifies credit cards, payday loans, and automobile loans as 'bad debt' that typically do not increase net worth and can lead to financial stress.

Why it matters

Understanding the difference between good and bad debt is crucial for Americans who are increasingly burdened by debt, with household debt surpassing $14.56 trillion in the U.S. as of 2020. This knowledge can help consumers make more informed financial decisions and avoid debt traps that can negatively impact their long-term financial health.

The details

The article explains that good debt, such as mortgages, student loans, and small business loans, can be leveraged to increase one's net worth or provide future value. Mortgages, for example, allow homeowners to build equity as property values rise over time. Student loans can lead to higher-paying careers, while small business loans can help entrepreneurs start and grow their own companies. In contrast, bad debt, like credit cards and payday loans, typically does not increase net worth and can come with exorbitant interest rates that lead to financial stress. The article also provides guidelines for determining if one has too much debt, such as the debt-to-income ratio.

  • In the fourth quarter of 2020, U.S. household debt surpassed $14.56 trillion, a $414 billion surge from the same period in 2019.
  • At the end of 2020, the average U.S. household debt was $92,727, a 10-year high.

The players

Federal Reserve Bank of New York

The Federal Reserve Bank of New York reported the surge in U.S. household debt in the fourth quarter of 2020.

Experian

The credit-monitoring company Experian reported the average U.S. household debt at the end of 2020 was $92,727, a 10-year high.

Small Business Administration

According to the Small Business Administration, almost one-third of small businesses fail to survive their first two years.

Bureau of Labor Statistics

The Bureau of Labor Statistics provided data on the median weekly income for workers with different levels of education.

Federal Housing Finance Agency

The Federal Housing Finance Agency reported that house prices have risen every quarter since September 2011.

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What’s next

As the article highlights, understanding the difference between good and bad debt is crucial for Americans looking to improve their financial health. Consumers should continue to educate themselves on debt management strategies, explore options like debt consolidation, and work with financial advisors to develop a plan to pay down high-interest 'bad debt' while leveraging 'good debt' to build wealth over the long term.

The takeaway

In an era of rising household debt, this article provides a valuable framework for consumers to distinguish between debt that can improve their financial standing and debt that can lead to financial stress. By recognizing the benefits of 'good debt' like mortgages and student loans, while avoiding the pitfalls of 'bad debt' like credit cards and payday loans, Americans can make more informed decisions to achieve greater financial security.