I was reminded recently about a book by Brittany M. Powell on real Americans and the types of debts they face, which led me to think about all the people we see every day. What are their stories? Are they worried about their finances, their debt? If I could say one thing to them: They are not alone.
The average personal debt per person in the U.S. grew 5 percent year-over-year from 2024 to 2025 according to Intuit Credit Karma. Bright spots exist, however. They begin here, with a simple primer on good debt versus bad debt, and how to best manage both so they don’t spiral out of control. Let’s get started.
Good debt builds wealth.
You responsibly manage it and pay it off.
Good debt is debt that you’re able to repay responsibly based on the loan agreement and is used to finance something that will offer a return on the investment.
The tried-and-true example of a good debt is your home mortgage. Many of us can’t buy a home with all cash, so we go into debt to carry a mortgage with a monthly payment. The mortgage debt, in turn, helps build wealth via a growing real estate asset, your home.
Another example is student loans. More education (past high school) raises your potential for a future higher income.
Bad debt harms your financial health.
It’s usually put toward depreciating assets.
Bad debt finances purchases that will quickly depreciate or are used solely for consumption, like dining out on credit cards or borrowing at a high interest rate for a top-of-the-line car.
It’s also “bad” when it negatively impacts your credit score.
Well-known examples of bad debt are credit cards that carry a high interest on balances. Other examples: department store credit cards (which are well-known for high interest rates), auto loans, and vacation loans.
Like a home loan, many of us carry an auto loan … or two … or three. The good news is that cars purchased with a large down payment and shorter-term loan are classified as good debt. That’s because large down payments usually mean lower interest rates, and a shorter loan term means you’ll pay less interest over the life of the loan.
Think it through before taking on any type of debt. Use these guidelines to steer your thoughts — and curb your “gotta-have-it-now!” urge, so that the debt you take on today doesn’t hurt you tomorrow.
• Potential return on investment: Consider the potential long-term gain in wealth building for taking on a short-term debt. For example, when you buy real estate or take out an affordable mortgage on a home, the chances of the return being higher than what you pay is most likely in your favor.
• Affordability: Can you afford to make more than the required minimum payment so that you’re paying off the debt instead of making only interest payments?
• Personal need: This is perhaps the toughest one. But ask yourself this to distill the real source of want versus need: Do you need what you are purchasing to put yourself in a better financial position?
• Time to payoff: Know how long it’ll take to pay off a debt before taking it on.
Key to managing any debt — and a high credit score — is paying on time and having a credit mix.
The amount of your outstanding debt doesn’t always have a direct impact on your credit score, as in lowering it, but your ability to pay it off does.
Pay every bill on time, every month, and you’ll enjoy a healthy credit score.
A “good” credit mix also is key.
An ideal credit mix includes both revolving accounts, like credit cards, and installment accounts, like loans.
Commonly used FICO Scores count your credit mix as 10 percent of your overall score. Through this mix, lenders gain proof that you can manage repayment on various types of debts.
When it comes to managing debt like credit cards, a low balance keeps your credit utilization rate, or how much credit you use, at a reasonable level as well. This also assures lenders that you don’t spend beyond your means.
Today’s Takeaways
• Good debt builds wealth. You responsibly manage it and pay it off.
• Bad debt harms your financial health. It’s usually put toward depreciating assets.
• Having a lot of debt won’t necessarily hurt your credit score. Not making payments on time will.
• A “good” mix of credit can boost your credit score.
• A low credit card balance assures lenders you don’t spend beyond your means.
Talking about debt as part of a larger financial-planning goal should never be stressful or shameful. There’s always a way forward, and a financial advisor can make that possibility a reality.
Lindsey D. Rhea, CFP, is owner and wealth strategist at Alia Wealth Partners,
connect@aliawealth.com.
