What Teens Should Know About Good Debt & Bad Debt
Last updated July 13, 2022
Part of practicing financial literacy is understanding what debt is. 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 can they affect your finances?
No matter what kind of debt you will have as an adult - either good or bad - debt is still debt. It's important to learn how to manage debt now to create a solid financial foundation for yourself in the future. Letting debt build up without having a strategy to pay it off can have significant negative effects on your finances and credit in the future.
With this in mind, here's the difference between good and bad debt!
Before making any big financial decisions, we strongly advise you to talk to a parent/guardian or a trusted adult. They can help you make informed choices about building credit and taking on debt that can ensure your financial stability and success in the future.
What is good debt?
“Good” debt is low-interest debt that helps you increase your wealth or income over time. An example of good debt is student loans. Student loans are considered good debt because you are investing in your education and working towards a credential or degree that should lead to you earning more lifetime earnings than someone who does not pursue a credential or degree, which can justify the need to borrow the money. That said, too much of any kind of debt can quickly turn into bad debt.
What is bad debt?
“Bad” debt is any debts that hold you back from reaching the financial success you want. While credit cards can be helpful in building and establishing good credit, they are often considered a "bad" form of debt. This is because:
- Many of them have high interest rates (around 25-30%).
- Some companies might encourage you to only pay the minimum statement balance instead of paying in full every month, which will draw out your debt even longer (and rack up some serious interest on the way)!
- Some companies will offer “rewards” or “incentives” to spend money 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 you are only paying the minimum balance every month instead of paying off your card, the debt will build up quickly (because of compound interest), and it will be much harder, and more expensive, to pay off your debt.
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