Good and Not-So-Good Debt

Some types of debt, including mortgages and student loans, are considered more favorable types of debt. These loans have potential long-term benefits, such as helping you own a home or earn more money in a job that requires a college education.

Student loans are considered good consumer debt. The loan can make the difference between attending school and not, and it’s been shown that additional education results in a lifetime of higher earnings. While it’s best to avoid debt, having a student loan and paying it off responsibly can enhance your earning power for years to come and positively affect your credit rating.

If you've decided now is the best time for you to go back to school or brush up on your skills, learn more about college planning here.
 
Less-favorable debt is revolving credit, such as major credit cards, store credit cards, and gas station credit cards. The items purchased on these accounts usually depreciate (lose value) over time and you end up paying more for the item if you don't pay it off right away.

Often, the items are consumables; that is, you use up or consume the item and it frequently must be replaced. By the time the credit card bill arrives, you already have used the purchase and have nothing to show for the money you spent. Eating out is a good example of a consumable.

Debts to be avoided include payday loans and rent-to-own store contracts.

When you must incur debt, strive to use favorable types for important, long-term benefits. Minimize your use of less-favorable debt — especially for purchasing consumables — and avoid bad debt at all costs.