Good Debt vs Bad Debt: What’s the Difference?
The question a friend actually asked me was this: is the €4,200 I owe on a student loan “good debt”, and is the €780 I put on a credit card in Lisbon “bad”? She asked it while we were both queuing for a coach that took 55 minutes to reach the airport, and I gave her the useless answer (“depends”), then spent two months thinking about it properly.
The distinction between good and bad debt isn’t moral, and it isn’t about the interest rate — it’s about what survives.
- Good debt buys something that keeps paying you back after the loan is gone
- A qualification, a language, a licence, a move to a city where wages are higher
- Bad debt buys something that has already stopped existing by the time the first statement lands
- Not about the interest rate, which is what everyone assumes
My student loan survives in the form of a degree I will still be using in 2040. That €780 credit card balance, which was mostly a Ryanair fare I hadn’t budgeted for and a hostel in Porto, bought me nothing I can point at now. If I had needed to cover the loan payment that month and had nothing in the account, I would have had to apply for a loan to do it, which is the moment you know you’re in the bad column.
Belief one: “Debt is debt, just pay it off fastest”
Two balances sat in front of me, one at 6% and one at 19%, and every sensible person says kill the 19% first. They are right. I still spent a week pretending my situation was special, which it was not, and the week cost me €14 in interest on the card while I decided. What makes a debt “good” doesn’t change the order you repay it in. If the interest is eating you, the label is a comfort you can’t afford.
Belief two: “Good debt is fine to carry forever”
This one does not hold up, and it’s the claim I’d argue hardest against. A student loan is good debt because the degree appreciates, but “appreciates” is a promise about the future, and futures get revised. I have a friend who took a €9,000 loan for a course she left after five weeks and now pays €61 a month for a certificate she never collected. The debt outlived the thing it was for. So my test now is: would I still call this purchase worth it in three years if it never led anywhere? If the honest answer is no, it’s not good debt, however respectable it sounds.
Belief three: “Bad debt is always small and stupid”
Untrue, and this is where the tidy categories break. My €780 card balance is annoying but survivable. The genuinely dangerous debt I’ve seen among people my age is a car loan of €11,400 taken on a salary of €1,400 a month, which is “bad” by every textbook definition, and yet it got someone to a job an hour away that the coach didn’t reach. It depreciates, sure. It also generates income. I don’t have a clean answer for that case, and I’d be suspicious of anyone who does.
Somewhere in the middle of all this I stopped keeping a spreadsheet and started keeping a single note on my phone: what is this money still doing for me, and when does it stop? The loan I’d take to finish the exchange year passes, easily. The card does not.
That’s the whole test, and it took me a €780 mistake to learn it.
If you’re weighing up a small loan to cover a gap, apply for a loan online only after you’ve worked out which column the purchase lands in, because the paperwork won’t tell you.
