Consumer debt is at an all-time high, with balances reaching $12.96 trillion as of September 2017. But not all debt is created equal. Whereas “bad” debt puts a dent in your wallet with little to show for it, “good” debt can help you meet your long-term goals, such as increasing your credit score.

Good Debt vs. Bad Debt

Credit Cards

Credit cards are generally considered sources of bad debt. Although they can help you establish or improve your credit and earn you rewards and cash back, they can also drag you down if you’re not careful. Carrying balances on cards with high interest rates can be especially detrimental.

Mortgages & Student Loans

Mortgages and student loans can be good debts because they can be paid off within a specified period to show a good payment history on your credit report and because they reflect a form of investment. The home you finance might eventually appreciate in value after just a few years. And your education could pay for itself many times over with good job opportunities and higher earnings.

Auto & Personal Loans

Auto loans and personal loans fall into a gray area. Even though a car depreciates in value, it can help you show a good payment history, and the convenience of owning a car can make the expense worthwhile. A personal loan for luxury purchases can be a bad idea, but if you’ve exhausted other options, using one to repay medical debt or tax debt, for example, can protect you against serious financial and legal consequences.

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Debt Management

Overwhelming debt drains your bank account and can take a serious toll on your emotional well-being. Your debt management strategy should include a realistic budget. Identify how much income you need for necessary expenses, then earmark part of your remaining income for debt repayment, beginning with the high-interest accounts.

Credit Counseling

Credit counseling is one solution for individuals struggling to manage debt on their own. Nonprofit counseling organizations can help you create a budget, and they can work with your creditors to establish an affordable repayment plan or to obtain debt settlements.

Debt Consolidation

Individuals with more serious financial problems might consider debt consolidation or even debt settlement. Debt consolidation refinances multiple high-interest accounts into one lower-interest account for faster and easier repayment.

Debt settlement involves hiring a for-profit company to negotiate with your creditors to accept less than you owe. The potential for scams and increased exposure to credit and legal repercussions makes this a risky option, so be sure to work with a reputable company.


Bankruptcy can enable you to restructure and repay your debt according to bankruptcy court guidelines or even eliminate your debt entirely in some cases. Although you can file on your own, a bankruptcy attorney can guide you through the process and educate you about your options.

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Debt at Various Life Stages

Your approach to debt and the effects of debt on your financial health change as you reach different life stages. Milestones like marriage and retirement play important roles, too.

Students often juggle credit card debt in addition to student loans, and the high cost of a heavy debt burden has led many young people to delay other personal and financial choices such as homeownership. Careful debt management can help you meet your financial obligations as you work toward your personal goals.

Debt also impacts new couples’ joint finances, such as planning joint purchases. Couples with children have additional issues to contend with, such as budgeting simultaneously for their children’s education savings, their own retirement savings, and supporting aging parents requiring increase medical care. Divorce or the death of a spouse can further complicate finances already impacted by debt.

Baby boomers are retiring with significant mortgage, credit card and student loan debt. Twenty-eight percent of middle-income boomers pay at least 40 percent of their income toward debt, even though a majority live on fixed incomes, according to a July 2016 Center for a Secure Retirement study. It’s never too early, and often not too late, to start working toward a low-debt or debt-free retirement.

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Debt and Credit Scores

Your credit history can either help you or haunt you when you need to borrow money, order utilities, or rent a home because lenders, utility companies, and landlords often look at an applicant’s credit history to see how well the applicant manages debt and other financial obligations.

Reports compiled by the credit bureaus — TransUnion, Experian and Equifax — detail your credit use and payment history. Credit scorers like FICO use the credit report data to assign credit scores that rate your default risk.

Responsible credit use and on-time payments can help you establish credit or repair bad credit. Although commercial credit repair services are useful in some circumstances, practicing good debt-management habits can be the best way to repair bad credit.

About the Author

Daria Uhlig is a personal finance, real estate and travel writer and editor with over 25 years of editorial experience, including past positions with The New York Times Co. and Oxford University Press, where she was a long-time contributor to The Oxford English Dictionary. Her work has been featured on The Motley Fool, MSN Money, AOL, Yahoo! Finance, CNBC and USA Today.

Daria studied communications at Centenary University in N.J. She currently lives on Maryland’s Eastern Shore, where she’s a licensed real estate agent specializing in vacation rental sales and management. Daria is also an avid photographer. She recently fulfilled a longtime goal to exhibit work at a local gallery, and she’s hard at work developing her next bucket-list project — Simply Over 50, a blog and online community aimed at helping women over 50 live better with less. Connect with Daria on LinkedInTwitter or Facebook.