What's the difference between good debt and bad debt?

Marianne Curphey 

When it comes to borrowing, is there such a thing as good debt? The answer is yes—but only if you stay in control of it. Money expert Marianne Curphey tells us how.

What is good debt? 

Good debt helps you start a business or buy a home. Most people can’t afford to pay cash for a house, and many successful businesses have been built with the help of an initial bank loan. So long as you can keep up with the repayments, you are working towards owning your house outright or creating a thriving business.

With a mortgage, try to pay off capital as well as interest each month, and with a business loan, make sure it’s not secure against your home or your personal assets so that if things go wrong, you’re not personally liable.

For many people, credit cards are also a form of good debt. By paying off your card in full every month, you’ve had the benefit of cash flow and also some consumer protection, for example when you use it to buy large items or book holidays.


What makes a good debt?

  • One that leaves you better off in the long term—such as a mortgage, loan for further education or a business start-up
  • One that you have thought through before you took it out
  • You have read all the terms and conditions and small print and understand the contract
  • One that you have a clear repayment plan for
  • One that is the cheapest option, lowest interest rate, or has the fewest penalties


When debt starts to go bad

Any debts that you can’t handle become bad debts. If your borrowing is mounting up and you don’t have a clear plan to repay it, or it is keeping you awake at night and you are starting to feel anxious and worried, then it’s time to think about making some changes. For example:

  • If you have a 0% credit card and it comes to the end of the 0% term and your plan is to try to find another similar deal, rather than planning to pay it off
  • If you start taking out loans to pay off other loans and credit card debts
  • If you are feeling worried and trying to hide the reality of your finances from friends and family
  • If you are resorting to payday loans because of a cash shortfall—interest rates on these are very high and once you start rolling them over you will quickly rack up more debt

The point at which debt becomes a problem differs from person to person. It’s not about amounts, it is about whether you are unable to keep up with your repayments

Read more: What your credit card company won't tell you


What are the warning signs that your debt has turned bad?

  • Making the minimum payment each month on your credit card
  • Using credit cards for essentials such as food shopping
  • Maxing out on your existing cards and your overdrafts
  • Juggling cards but never paying them off
  • Taking out a payday loan


Where to get help

If your debt is starting to get out of control, there are debt charities who will help you sort it out, for free. Don’t pay for debt advice – the free services are run by trained debt counsellors who can negotiate with your creditors on your behalf.

Often fear and shame stop people from confronting the debt and this affects their ability to deal with it. Debt charities won’t judge you. They understand that it’s often life events like starting a family, illness, depression, divorce or bereavement which start the circle of debt.

It is always good to get advice if you are worried about debt, even if you just need reassurance and put your mind at rest. The Money Advice Service has an excellent website with advice on how to tackle debt.

Debt charities can work out a budget for you to help you get back on top of your finances and increase your repayments. They may tell you about benefits or allowances that you should be claiming.


Going forward

Once you’ve sorted out your debt, it’s important to try to stick to your good habits.

Consider the way you spend and how you manage your budget.

Think about having a week where you try not to spend—do free activities or have one day a week when you only use cash and leave your cards at home. It’s about making yourself a more conscious consumer, and being clearer about the spending choices you make.

For more information take a look here:
National Debtline
Citizens Advice Bureau
StepChange Debt charity