An important part of money management is understanding debt and how it works, since it can have significant impacts on your finances and credit in the future. There are different types of debt you will encounter as an adult – typically known as "good debt" and "bad debt" – but what's the difference between the two, and how do they affect you? Here's what teens should know about good and bad debt!

Note: Before making any big financial decisions, we strongly advise you to talk to a parent/guardian or a trusted adult. 

What is good debt?

"Good" debt is debt that helps you increase your wealth or income over time, often with lower interest rates than other types of debt. Examples of good debt include student loans. Student loans are considered good debt because you are investing in your education and working toward a credential or degree that can help you earn more across your lifetime, justifying the need to borrow money. That said, too much of any kind of debt can quickly turn into bad debt.

What is bad debt?

"Bad" debt typically refers to high-interest debt that's difficult to repay and doesn't contribute to your financial growth. While credit cards can be helpful in building and establishing credit, they are often considered a "bad" form of debt. This is because:

• Many of them have high interest rates (around 20-22%).
• Some companies might encourage you to pay only the minimum statement balance instead of paying in full every month, which will draw out the amount of time it takes for you to repay your debt with interest.
• Some companies will offer rewards or incentives to encourage spending on your card. This can lead you to spend money that you might not have.

If you have a high-interest credit card and pay off your balance each month, then having a credit card shouldn't be a problem. But if you have a high-interest credit card and are only paying the minimum balance every month, the debt will build up quickly, potentially making it harder and more expensive to pay it off. 

Learn more

• Understand how credit cards work
• Learn how to build credit
• Learn about investing

Have any questions about money management? Text #Jobs to 33-55-77. If you're using a mobile device, click here to have the text message set up for you!