Chances are, ‘good’ isn’t the first (or second, or third) word that comes to mind when you think of debt. But both good and bad debt exist. And it’s important to understand the difference between the two.
So, what is good debt?
Good debt gives you the opportunity to move forward financially. It’s money borrowed for something that can grow in value or boost your future income. And it’s often planned and repaid over time, with a clear benefit in return.
What is an example of good debt?
- Student loans: investing in education that can lead to better job prospects.
- Mortgages: buying property that could rise in value over time.
- Business loans: funding ideas that might bring in long-term profits.
- Real estate investment loans: where rental income can cover repayments.
Key features of good debt:
- Usually low interest
- Linked to something valuable in the future
- Repayable over the long term
- Helps build your net worth
Good debt vs bad debt: a simple comparison
| Feature | Good Debt | Bad Debt |
| Purpose | Long-term benefit | Short-term want |
| Value | Appreciates or generates income | Depreciates or loses value |
| Interest | Often lower | Often higher |
| Risk | Lower if managed well | Higher due to potential missed payments |
Now on to bad debt
Bad debt is borrowing money for things that don’t hold their value or generate income – often with high interest rates. It’s easier to fall into and harder to get out of, especially if payments aren’t managed well.
Common examples of bad debt:
- High-interest credit card balances
- Payday loans
- Loans for non-essential or luxury purchases
- Gambling or lifestyle debt
Key signs of bad debt:
- High interest or unclear fees
- Linked to short-term spending or impulse buys
- No long-term value
- Difficult to repay
Can good debt turn bad?
Yes. Even ‘good’ debt can become unmanageable. A job loss might make it hard to keep up with your mortgage. A business loan might not pay off. That’s why planning and staying on top of repayments is so important.
On the flip side, some ‘bad’ debt can be used smartly. Take credit cards. If you pay off the full balance each month, you avoid interest – essentially borrowing for free. Plus, using a credit card regularly and responsibly can help build your credit score over time. That’s because it shows lenders you can manage credit well. But it only works in your favour if you stay on top of repayments. Missing even one can undo all that good work.
Managing good debt the smart way
- Only borrow what you need
- Research the best rates and terms
- Create a repayment plan that works with your budget
- Check in regularly – adjust if needed
How to clear bad debt
- Track your spending: Knowing where your money goes is key
- Pick a repayment method: Try the snowball (smallest debt first) or avalanche (highest interest first).
- Get support: A free credit counsellor like those through StepChange might be able to help you create a plan. And you can always contact your local Citizen’s Advice Bureau.
- Speak to your lender: They might agree to help you with a more manageable plan.
How can Zilch help?
Sometimes you need to spend on something unexpected and essential, like a leaky tap or urgent travel. That’s where Zilch can help.
By spreading the cost with Pay over 6 weeks, or Pay over 3 months, you give yourself a little financial breathing time and avoid high interest (there isn’t any) (fees may apply). Make sure you pay your instalments off on time though – this is unsecured lending and missing payments can negatively impact your credit file.You can also use Pay now and earn up to 5% back in Zilch Rewards. Either way, it’s a pretty solid way to handle necessary spending, without the extra costs that often come with credit cards.