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Good Debt vs. Bad Debt: The Mortgage vs. the Credit Card

Money Basics • Beginner Investing • 6 min

What this lesson is about

Not all debt is the same. The interest rate, what it buys, and whether that thing grows in value are what actually separate a smart loan from a trap.

2 parts · a quick check after each · then the quiz

Part 1 of 2

Not, all, debt, is, created, equal., The, same, word,, "debt,", describes, both, a, 30-year, mortgage, at, around, 6., 7%, interest, that, helps, you, build, equity, in, a, home,, and, a, credit, card, balance, charging, north, of, 20%, interest, on, a, purchase, that's, already, been, used, up., The, label, "good, debt", versus, "bad, debt", isn't, about, debt, being, inherently, virtuous, or, evil., It's, about, what, the, borrowed, money, is, used, for, and, what, it, costs, to, borrow, it.

Generally,, "good, debt", tends, to, carry, a, relatively, lower, interest, rate, and, finance, something, that, can, grow, in, value, or, increase, future, earning, power,, a, mortgage, on, a, home,, a, reasonable, student, loan, tied, to, real, earning, potential,, or, a, loan, to, start, a, viable, business., "Bad, debt", tends, to, carry, a, high, interest, rate, and, finance, something, that's, consumed, immediately, or, loses, value, fast,, with, credit, card, debt, as, the, textbook, example.

Quick check

In the "good debt vs. bad debt" framing, what generally makes a mortgage look more like "good debt"?

Part 2 of 2

Insider, Angle:, even, "good, debt", can, turn, into, a, real, problem, if, the, amount, borrowed, exceeds, what, someone, can, comfortably, repay,, a, low, interest, rate, doesn't, protect, anyone, from, being, genuinely, overextended., The, average, credit, card, interest, rate, has, run, well, above, 20%, in, recent, years,, while, a, 30-year, fixed, mortgage, has, typically, run, somewhere, around, 6-7%, in, the, mid-2020s., Meaning, a, $5,000, credit, card, balance, carried, for, years, can, end, up, costing, more, in, interest, than, a, much, larger, mortgage, balance,, purely, because, of, the, enormous, rate, gap., Mortgage, interest, can, also, be, tax-deductible, for, those, who, itemize, deductions,, another, real, difference, credit, card, interest, doesn't, offer, at, all.
Try, This:, Look, up, the, current, average, credit, card, APR, and, the, current, average, 30-year, mortgage, rate., Calculate, how, much, $5,000, of, debt, would, cost, in, interest, over, one, year, at, each, rate,, assuming, no, payments, were, made, toward, the, balance.
What insurance is forIt costs more in a normal year and removes the year that ends you.

Quick check

Why is credit card debt often held up as the classic example of "bad debt"?

Quiz

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