When I was growing up my parents taught me that debt was a bad thing and to be avoided at all costs.  As far as I can recall the only debt of any consequence they ever took on was the modest mortgage to buy their first property. At the time nobody taught me that there was such a concept as good debt and bad debt.


As I grew older I started to realise that debt could in fact be a very useful tool when used properly but equally, it could cause you much harm. Over the years I learned a number of important lessons both from my life experience and equally from my observations of other people’s behaviour and my own study of the subject of debt. Certainly reading the book Rich Dad Poor Dad by Robert Kiyosaki opened my eyes because the author explained the difference between good debt and bad debt. Once I understood it the penny dropped.


Now it is crystal clear to me what is good debt and what is bad debt.



Good debt is which allows you to acquire assets which have the potential to grow in value and where the capital and interest repayments are comfortably affordable and the interest rate is reasonable. Such debt is called secured debt such as a mortgage on a house where the debt is registered as a legal charge against the property.


Bad debt on the other hand allows you to spend money on stuff which has no lasting value and certainly no potential to grow in value for example fashionable and trendy clothing, shoes, handbags, entertainment, eating out etc. Such expenditure is commonly known as discretionary spending. Such debt is called unsecured debt and interest rates are usually higher and sometimes substantially higher than the rates available on secured debt.


Bad debt can lead to many problems such as relationship breakdowns, bankruptcy, Individual Voluntary Arrangement (IVA) with your creditors, personal embarrassment, humiliation and even suicide.



Generally, a mortgage to buy your own home should be considered as good debt especially if you have paid a decent deposit and the cost of renting is higher than your mortgage repayments. However, if you were to extend yourself and borrow more than you could comfortably afford then it could become bad debt if, for example, you encountered difficulty in repaying your mortgage in the future because you could potentially have your home repossessed.


On the other hand, if you take out a buy-to-let mortgage to buy an investment property that is usually regarded as good debt as long the rental income comfortably covers the mortgage repayments and the other property bills so that you make a good profit each month. Where it could potentially be a problem would be if interest rates were to rise too high and/or you suffered periods of unoccupancy leading to negative cash flow.  Under those circumstances, your good debt would become bad debt.


You could use secured debt to finance a business or even to buy investments. You have to appraise such buying decisions sensibly in the knowledge that such purchases will in all likelihood lead to profits.


Unsecured debt such as credit cards, unsecured loans and bank overdrafts can potentially ruin you if not kept in check. Credit cards, in particular, can create a trap for you, especially the ones with very high-interest rates of 30% or more. You have to be very disciplined with credit cards and repay the full balance every month without fail otherwise the debt can spiral out of control. On the other hand, 0% interest credit cards are arguably good debt as long as you are confident of repaying the balance in full at the end of the offer period.



So as you can see there are clear distinctions between what is good debt and bad debt but also that some good debt can become bad debt and vice versa depending on your personal circumstances.  Whatever you do, spend your money wisely but don’t be afraid of debt altogether. If you only borrow good debt and you manage it well you can prosper. The main thing to do is exercise common sense and financial self-discipline. You know it makes sense.*


Financial Conduct Authority does not regulate some forms of Buy to Let mortgages. Your home may be repossessed if you do not keep up repayments on your mortgage. The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future.  This blog is based purely on the author’s personal opinion and it is not our firm’s view.