Walking the line between good and bad debt

Good vs bad debt

A good debt is generally one that enables people to ‘invest’ in something they need to enhance their lives and increase their standard of living. They know they will have sufficient income and time to repay over time.

A bad debt is generally one incurred to cover day-to-day costs, goods or services, and which may be a substitute for regular saving or budgeting. These debts can indicate a deteriorating financial situation.

When debt can be a positive investment

Some debt can help you build long-term financial wellbeing – this is often called “good debt.” Examples include:

• Mortgages: Buying a home can build equity over time.
• Student loans: Investing in education may increase your earning potential.
• Business loans: Starting or growing your own business can create future income.

Good debt is usually:

• Well-researched: You’ve compared rates and terms, and chosen the most suitable option.
• Affordable: You’re confident you can keep up with repayments, even if circumstances change.

Debt best avoided

Other types of borrowing are riskier, especially if they don’t add value over time. For example:

• Using credit for holidays or luxury items: These purchases won’t increase in value and can lead to long-term repayments.
• Borrowing for everyday expenses: Relying on credit for groceries, utility bills, or other essentials can signal an unsustainable financial situation.
• Debt repayments over 36% of gross income: Levels of borrowing above this threshold are generally considered too high.

An occasional treat is fine, but unless it’s an interest-free loan, borrowing to buy goods or services simply means you’re paying more for them in the long run – sometimes significantly more.

Questions to ask before borrowing

Ask yourself:

• Why am I borrowing, is it essential or are there alternatives?
• Will borrowing improve my financial future?
• Are there more suitable borrowing options?
• Are repayments comfortably affordable even if interest rates rise?
• Is the lender reputable?
• What are the terms of the loan? Do I understand the conditions and the consequences of missing payments?

Reflecting on these questions can help you make more informed choices and avoid overspending.

When good debt turns bad

All debt comes with risks – even “good” debt can become a problem if things change unexpectedly and you can no longer afford the repayments. This can put your assets at risk if they’re used as security for the loan. There are many reasons debt can become unaffordable:

• The interest rate is variable and increases more than expected.
• Your circumstances change and you can’t work.
• The investment you’re making doesn’t work out.
• Your assets (like your home) are at risk because they’re used as security for the loan.
• You’ll still be repaying debt in retirement.

Staying on track

It’s nearly impossible for most people to live completely debt-free. But with careful planning, you can use debt as a tool to improve your life and invest in your future.

Need help?

If you or someone you know needs help with budgeting or debt, the following organisations provide useful information, tools and support to help.

• Moneyhelper Budget planner
• National Debtline
• Citizens Advice

This article was last updated in August 2025