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🌱 Money Foundations · Lesson 4 of 11 · 8 min

Good Debt vs Bad Debt

⚖️ A mortgage and a maxed-out credit card are both 'debt' — the way a guard dog and a raccoon in your kitchen are both 'animals in the house.' One has a job. The other is just eating your money in the dark.

💡 Key idea

Good debt is a tool that builds. Bad debt is an anchor that drains.

🧠 Why it matters

GOOD debt buys something that grows in value or boosts your income — a mortgage, a student loan for a degree that raises your pay, a small-business loan. It usually has a lower interest rate. BAD debt buys things that lose value the second you own them, at high interest — credit-card balances, payday loans, financing a depreciating car you can't afford. The test: is this debt working for me, or am I working for it?

🌍 In the real world

💳 The killer with bad debt is the interest. A $5,000 credit-card balance at 24% APR, paying only the minimum, takes over 14 years to clear and costs you thousands extra. The same $5,000 as a 6% student loan is a totally different animal.

📌 Takeaways

  • Good debt grows value or income (often low rate)
  • Bad debt buys depreciating things at high rates
  • Ask: is the debt working for me, or am I working for it?

✅ Test yourself

Which is the BEST example of 'good' debt?
  1. A credit-card balance
  2. A payday loan
  3. A mortgage on a home
  4. Financing a $2 coffee

Answer: C · A mortgage on a home

A mortgage buys an asset that can grow in value and usually carries a relatively low interest rate.

What makes credit-card debt so dangerous?
  1. It's illegal
  2. High interest rates make balances balloon over time
  3. It can't be paid off
  4. Banks hide it from you

Answer: B · High interest rates make balances balloon over time

At ~24% APR, paying only the minimum, balances grow for years and cost a fortune in interest.

The simplest test for whether debt is 'good' is:
  1. Is it over $1,000?
  2. Is the debt working FOR me, or am I working for IT?
  3. Did a friend recommend it?
  4. Is it from a big bank?

Answer: B · Is the debt working FOR me, or am I working for IT?

If the borrowed money builds value or income faster than its cost, it's working for you. If it just funds depreciating stuff at high interest, you're working for it.

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