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In our society today, debt is a huge problem. You should try to avoid debt if at all possible, because this debt is one thing that can really hold you back from financial freedom. But not all debt is created equal. There are some types of debts that can be considered "good debt," and some other types of debt that would be considered "bad debt."

The difference between "good debt" and "bad debt" is what you're actually going into debt for. For the most part, you can ask yourself whether this debt now will help improve your financial situation in the future, and if the answer is yes, then it's good debt.

What type of debt is this? For one, student loan debt. Typically a college graduate will earn much more over their career (studies suggest at least $1 million) than non-college graduates. So yes, you're going into debt now, but the rate of return on that can be great. Plus, you're usually paying low interest for that.

Another type of good debt is a mortgage. It's expensive obviously, but you'll be owning a house, which is an extremely valuable financial asset once you can get it paid off. Those are good debts. In short, good debts help you to be in a better financial position than you had previously been in before you acquired the debt. Things such as student loans or a mortgage both are capable of doing this (as long as you use the debts properly and smartly, which is not always the case).

What's a bad debt? Well, the obvious. The biggest thing is credit card debt... in many cases, people get into credit card debt because they just buy what they want, and not what they need. If you're falling deep into credit card debt for material things, that's a bad thing, and that is definitely bad debt. Credit cards can be so dangerous because they make getting into debt so easy, but the high interest rates make it so hard to get out if you've fallen in. Credit cards can be a powerful thing, but they can also help get you into some bad debt.

So there is a difference between good debt and bad debt. Good debt will likely help put you in a better financial position in the future, whereas bad debt will not. Ideally, you should not have any debt, but if you do, hopefully it's good debt!

Learn more about this author, Juan Leer.
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