Debt often gets a bad reputation. For many, it’s a cycle of owing money they can’t afford, creating stress and frustration. But not all debt is inherently bad. In fact, some types of debt are necessary, even beneficial. The key is understanding the difference between good debt and bad debt—and making wise choices about how you borrow money.

What is Good Debt?

Good debt is money borrowed to purchase assets that either appreciate in value or generate income. Think of it as an investment in your future. Here are some examples:

• Mortgage Loans: Borrowing money to buy a home is often considered good debt. Over time, the value of your property may increase, and in the case of rental properties, you could earn passive income through rent payments.

• Student Loans: While student loans may feel like a burden, they can be good debt if they lead to a higher-paying job and career opportunities. Education is an investment in your skills and future earning potential.

• Rental Properties: For property investors, a mortgage can be a way to generate income through rental payments, while also benefiting from potential property value appreciation. Plus, there are tax deductions available for expenses like loan interest, insurance premiums, and repair costs.

Good debt is powerful because it can lead to wealth-building opportunities and long-term financial growth. But like all things, moderation and careful planning are key.

What Makes Debt Bad?

On the flip side, bad debt is money borrowed to purchase things that don’t appreciate in value or generate income. These are often lifestyle purchases that may feel rewarding in the moment, but they can quickly become financial burdens. Examples include:

• Credit Card Debt: Using credit cards for everyday expenses, especially when you can't pay off the balance in full, is a prime example of bad debt. The high-interest rates can quickly snowball, leaving you with more debt than you started with.

• Personal Loans for Non-Essential Purchases: Taking out loans to buy cars, electronics, or vacations may seem convenient, but these items don’t generate income and lose value over time. This type of borrowing doesn’t create long-term value and can trap you in a cycle of debt.

• Unnecessary Spending: Borrowing for luxuries or items you can’t afford to pay for upfront is an easy way to fall into bad debt. The problem is that these purchases don't add any lasting value to your financial situation.

When Good Debt Goes Bad

Just because a debt is considered “good” doesn’t mean it’s immune to becoming bad. The key lies in how you manage it.

For instance, mortgages are generally good debt, but borrowing more than you can afford to repay could lead to financial struggles and, in the worst case, foreclosure. Ideally, your housing costs—mortgage, insurance, and taxes—shouldn’t exceed 28% of your gross monthly income. If you’re earning RM5,000 a month, your total housing expenses should stay below RM1,400 to avoid financial stress.

Similarly, student loans are considered good debt, but they can turn bad if you’re unable to secure a well-paying job after graduation. If you’re stuck with student loan payments that exceed your income, this “good” debt can feel overwhelming.

How Bad Debt Gets Worse

Bad debt, especially from high-interest sources like credit cards, can spiral out of control. If you fail to make timely payments, your credit score can suffer, making it even harder to get approved for loans in the future. And as you continue to miss payments, your debt will grow due to compound interest.

For example, if you owe RM10,000 on a credit card with an 18% annual interest rate and make only the minimum payment of 5% or RM500 per month, it will take you over seven years to pay off the balance—plus an additional RM4,000 in interest!

Managing Bad Debt

The good news is that bad debt can be managed and reduced. Here’s how you can tackle it:

1. Pay Off High-Interest Debts First: Focus on clearing debts with the highest interest rates first, like credit card balances. This will reduce the amount of interest you pay in the long run.

2. Consider a Balance Transfer: If you have significant credit card debt, a balance transfer could help. By transferring your debt to a new card with a lower interest rate (or even 0% for up to a year), you can stop the clock on interest and pay off your balance more quickly.

3. Explore Personal Loans for Debt Consolidation: Personal loans often have lower interest rates than credit cards. By consolidating your high-interest credit card debt into a personal loan, you could save on interest and pay off your debt faster. But be sure to consider the fees and terms associated with the loan before making a move.

4. Stay Disciplined: Whether you choose a balance transfer or a personal loan, the key to success is discipline. Avoid using the credit card you transferred the debt to, and don’t add new purchases to the loan balance.

The Bottom Line: Debt in Moderation

For most adults, debt is simply a part of life. Few can afford to pay cash for everything, whether it’s a house, an education, or a car. However, just because debt is common doesn’t mean it’s always good.

The key is to use debt strategically. Good debt can help you build wealth, while bad debt can trap you in a cycle of financial stress. So, always make sure you understand the purpose of the debt, how you plan to repay it, and the potential risks involved.

Remember, even good debt can turn bad if you’re not careful. The best approach is to borrow responsibly, stay within your means, and keep your financial goals in sight. In the end, a balanced approach to debt can help you achieve financial success without falling into a trap.