The Two Questions
To judge any debt, ask:
- What does the money buy? Something that grows in value or increases your income - or something that loses value the moment you own it?
- What does it cost? A low, fixed rate you can comfortably service - or a high, compounding rate that outpaces any benefit?
Good debt tends to buy an appreciating or income-producing asset at a manageable cost. Bad debt tends to fund consumption at a high cost. Most real-life debt sits somewhere on the spectrum between.
What Usually Counts as Good Debt
- A mortgage: Buys an asset that has historically held or grown in value, at relatively low rates, while giving you somewhere to live. It can still go wrong if you overborrow.
- Student loans (in moderation): Can raise lifetime earning power. Good only if the expected income increase justifies the balance - the maths matters more than the credential.
- A business loan: Borrowing to generate income that exceeds the cost of the debt. Productive by design - if the business performs.
What Usually Counts as Bad Debt
- Credit card balances carried month to month: High compounding rates funding past consumption. The textbook example of bad debt.
- Payday and high-cost short-term loans: Rates so high they can trap borrowers in a cycle. Almost always the worst option available.
- Financing depreciating goods you cannot afford: A car far beyond your budget, gadgets on installment plans. The debt outlives the value.
The Rate Is Half the Story
Even "good" debt turns bad if the cost is too high or the balance too large to service. A mortgage that stretches you to the point of missing other goals is not doing its job. And a low rate on something worthless is still money poured away.
This is why the mechanics of how interest works sit underneath this whole framework. A high compounding rate can turn any borrowing into a burden faster than most people expect.
How to Use This in Practice
The framework gives you a payoff order. Attack the worst debt first - highest cost, least to show for it - while maintaining minimums on productive, low-rate debt you are comfortable carrying. There is rarely a reason to rush extra payments at a low-rate mortgage while a high-rate card compounds against you.
Once you have sorted your debts this way, the avalanche vs snowball methods give you the execution plan, and a debt-free timeline shows you when the finish line arrives.