The Problem With Calling Some Debt "Good Debt"

In 2022, Bryanna Hambrick bought a three-bedroom house in Columbus, Ohio, hoping to save on rent and build wealth. Because of a new property tax value and a higher interest rate than she thought, her bill each month ended up being almost $1,200, which was about $200 more than she had planned. Much of her savings went to closing costs, and unexpected repairs have kept her living paycheck to paycheck. CNBC says her story shows a wider problem: even debt that looks like a smart investment can become a burden.

Mortgages and student loans are often called "good debt," since they can help people build wealth or earn more. "Bad debt" usually means credit card balances, car loans and personal loans, because they often pay for things that lose value. But financial experts say the "good debt" label can hide the risks and push people to borrow more than they can handle.

Sheila Bair, an author and former chair of the Federal Deposit Insurance Corporation, said she now avoids talking about "good debt." In her view, you should always start out against debt, because it weighs on your future finances. She said young people should not feel pressured to buy a home or to borrow for college. The choice needs to make sense for you, and for some people it will not.

She suggests asking whether the debt will really improve your finances, and then checking the details. For a mortgage, that includes the home's price, the loan terms and how stable your income and savings are. Do your own math on what payment you are comfortable with, because lenders look at what you can repay, not at what fits your budget. Bair also suggests planning to live in a home for at least five years to cover the costs of buying and the chance that prices dip for a while.

The housing crash before the 2008 financial crisis shows how "good" debt can go wrong. Home prices rose sharply from 1998 to 2006 as lending grew, including to people with weaker credit, and some borrowers took on big mortgages expecting that prices would keep rising.