Most people have credit card debt, mortgage debt, car loans, personal loans, and student loans. In essence, they are obligations we need to pay back for borrowing money. Not all debts are the same. What constitutes a good debt?

Mortgage Debt

Buying a house and having a mortgage payment is considered a good debt, as long as you can make the monthly mortgage payments. Making these payments consistently will strengthen your credit score. In addition, the interest portion of these payments can be written off your taxes. By making mortgage payments, you’ll be building up equity in your home, which you can leverage for other loans, or just retire debt associated with the house.

When taking out a mortgage it’s important to understand what product is best suited for you. Not understanding the lending instrument can lead to more debt. For instance, during the housing bubble many people could not afford the homes they were buying and they were acquiring interest only or adjustable rate mortgages. Unfortunately, the housing market collapsed, and these homes are worth much less than what people paid for them. Thus their debt increased, because they didn’t have enough equity, or the payments rose due to adjustable rate loans. When buying a house, try to get a fixed rate loan. Then the mortgage owner will know what the monthly payments are needed to be paid, regardless of the interest rate environment.

Student Debt

Obviously this debt is considered a good debt, because you’re making an investment in yourself. Hopefully these debts will help you get a higher paying job in the future. Studies have shown that people with college degrees have a higher earning potential than those with just high school diplomas. These debts are usually paid back over 10 years from graduation from college.

Bad debts are the following…

Credit Cards That Carry Balances

These debts are bad, because if you carry a balance you could be charged anywhere from 13% to 30% a month on your balances, depending on your credit history. Credit cards should only be used if you have the available cash to pay off the balances monthly. Studies show that the average family in the United States has a credit card debt of $10,000. These should be paid off immediately, unless you have other debt problems, such as paying your mortgage or car loans.