Difference between a Good and a Bad Debt

A good and a bad debt are differentiated by looking at the purpose behind taking the debt. A debt that is taken on for a fruitful purpose that will serve to enhance the financial situation and well-being of the individual is considered to be a good debt. There is a debt that implies unnecessary expenditure is considered to be a bad debt.

The classic example of a good debt is a student loan where the return on the loan is expected to be much more and the financial benefits lifelong. A student loan is expected to increase the earning potential of the individual and thus thought to have a clear and positive effect on the life of the person. It can even be thought as an investment for the future.

For this reason, credit card debts are considered to be batted debts as they are frequently used to make impulsive purchases, some of which cannot be afforded by the borrower and plans them in a position of debt and financial strife. However, it should be understood that a credit card is a great financial two and if used wisely can bring about a large degree of convenience and financial freedom in a person’s daily life.