Table of Contents
As anyone who has ever watched their bank account balance decline after paying bills knows, owing money is no fun. But debt often serves an important function in people’s lives, putting things that can cost tens of thousands of dollars or more, such as a college degree or a starter home, within reach.
Such cases aren’t quite the same as racking up a high credit card balance on restaurant meals and shopping trips, underscoring that when it comes to owing money, there can be good debt and bad debt.
Key Points
• Good debt, such as mortgages, can build wealth through property value increases.
• Student loans are considered good debt as they can enhance earning potential over time.
• Credit card debt is bad due to high interest rates, making purchases significantly more expensive.
• Car loans are often categorized as bad debt because vehicles depreciate rapidly.
• Managing debt effectively involves distinguishing between types that add value and those that do not.
What Is Debt Exactly?
It’s a simple four-letter word, yet debt is often not as straightforward as it may appear. Carrying a credit card balance? That’s debt. Have a student loan or a car lease? Also debt.
When individuals owe money, they generally have to pay back more than the amount they borrowed. Most debt is subject to interest, the borrowing cost that is applied based on a percentage of the money owed. Interest accrues over time, so the longer consumers take to pay off debt, the more it may cost them.
Across people and households, debts add up. According to the Federal Reserve Bank of New York, by the second quarter of 2026, total household debt climbed to $18.8 trillion. Housing debt — specifically mortgages and mortgage refinancing — accounted for the majority of money owed, $13.58 trillion. Nonhousing debt, such as credit card balances and school and car loans, accounted for the rest.
For individuals, average debt amounted to $105,444 in the fall of 2025, according to the credit reporting company Experian. While student loan debt was down, shrinking by 5.5% from the year before, many other debts, including amounts owed on credit cards, car loans, home equity lines of credit (HELOCs), and mortgages, all increased from the year before.
SoFi Coach℠Chat is a tool designed to help you view and analyze your financial data, get personalized insights, learn about SoFi products, troubleshoot issues, and take certain actions in chat. Coach responses are information for you to consider and not financial advice. Coach responses are based on limited information from your connected accounts and may have inaccuracies. The insights are meant to help you think about your finances and options —they are not advice or recommendations, and they do not guarantee results. Coach may offer you options to explore SoFi products on which SoFi would earn revenue. You are solely responsible for any financial decisions you make. Coach is offered by Social Finance, LLC.
Recommended: Free Credit Score Monitoring
Good Debt vs Bad Debt
When you have debt, not only do you have to repay the money borrowed, but you also usually incur ongoing costs — specifically interest — which increase the amount you have to pay back.
While incurring more debt probably isn’t the most attractive proposition, there are occasions when taking on debt can be necessary or even beneficial in the long term. This is where good debt vs. bad debt comes in.
Though the idea of good vs. bad debt might seem complicated (and is often subject to some misconceptions), as a rule of thumb, the difference between good debt and bad debt usually has to do with the long-term results of borrowing.
Good debt is seen as money owed on expenditures that can build an individual’s finances over time, such as taking out student loans in order to increase one’s earning potential or getting a mortgage on a house that is expected to appreciate in value.
Bad debt is money owed for expenses that pose no long-term value to a person’s financial standing or that may even decrease in value by the time the loan is paid off. This can include credit card debt and car loans.
While owing money may not feel great, debt can serve some helpful functions. For starters, your credit score is used by lenders to determine your eligibility and risk level when it comes to borrowing money.
Your credit score is based on your history of taking on and paying off debt, and it helps to inform a lender about how risky it may be to issue you a loan. Your credit score can play an important role in determining not only whether a credit card or loan application will be approved but also how much interest you will be charged.
With no credit history at all, it may be harder for a lender to assess a loan application. Meanwhile, a solid track record of paying off good debt on time can help inspire confidence.
While there are no guarantees, good debt can also mean short-term pain for long-term gain. That’s because if paid back responsibly, good debt can be an investment in one’s future financial well-being, with the results ultimately outweighing the cost of borrowing.
Conversely, with bad debt, the costs of borrowing add up and may surpass the value of a loan.
What Is Considered Good Debt?
Mortgages
Like other lending products, mortgages are subject to annual interest on the principal amount owed.
In the United States, the average rate of a 30-year fixed-rate mortgage was averaging 6.67% nationally in August 2026, according to the Federal Reserve Bank of St. Louis. That’s up from August 2025, when the average rate for a 30-year fixed-rate mortgage was 6.58%.
Meanwhile, data from the Federal Housing Finance Agency showed that home prices grew 2.2% from May 2025 to May 2026.
This illustrates how the potential appreciation of a home might outweigh the cost of financing. But it’s best to not assume that taking on a mortgage to buy a house will increase your wealth. Things such as neighborhood decline, periods of financial uncertainty, and the individual condition of a home could reduce the value of a given property.
Personal loans or home equity loans used to improve the condition of a home may also increase its value and in such instances may also be considered good debt.
Recommended: Should I Sell My House Now or Wait?
Student Loans
Twenty percent of Americans with undergraduate degrees and 24% of postgraduate degree holders have outstanding education debt, with the average federal student loan debt in the U.S. coming in at around $40,467, according to the Education Data Initiative.
But higher education may be linked with greater earnings, and cumulative income gains might eclipse the cost of a student loan over time.
According to the U.S. Bureau of Labor Statistics, the median weekly earnings for college graduates with at least a bachelor’s degree are $1,754, which is about $800 greater than the median weekly pay of someone with a high school diploma.
But just as taking out a mortgage is not a sure-fire way to boost net worth, student debt is not always guaranteed to result in greater earnings. The type of degree earned and area of focus, unemployment rates, and other factors will also influence an individual’s earnings.
Recommended: Staying Motivated When Paying Off Debt
What Is Considered Bad Debt?
Credit Card Debt
Credit cards can be useful financial tools if used responsibly. They may even provide cash back or other rewards. And because interest is generally not charged on purchases until the statement becomes due, using a credit card to pay for everyday purchases need not be costly if the balance on the card is paid before the billing cycle ends.
However, credit cards are often subject to high interest rates. According to May 2026 data from the Federal Reserve Bank of St. Louis, the average interest rate for credit cards is 20.94%, but some banks may charge even higher rates.
Credit card interest adds up, making that takeout dinner or pair of jeans far more costly than the amount shown on its price tag if a balance is carried over. For example, if you were to charge $500 in takeout food to a credit card with a 20% annual percentage rate (APR) but only pay the $10 minimum each month, it would take nine years to pay off the full balance. The total amount paid, including interest, would be $1,084. That’s more than double the cost of those takeout meals!
If you’re paying down credit card debt, consider enlisting the help of a budget app from SoFi. You can use it to get spending breakdowns, credit score monitoring, and more at no cost.
Car Loans
The dollar value of your car may not be what you think it is. Cars famously start to lose value the second you drive them off the lot. A new vehicle loses 20% or more of its value in the first year of ownership, according to Kelley Blue Book. After five years, a car purchased for $40,000 will be worth $18,000, a decrease in value of 55%.
But a car may also be necessary for getting around. For some individuals, owning a car can also help them earn or boost income, reducing or negating depreciation.
The Takeaway
Both good debt and bad debt can be stressful, and both types of debt can be more costly than they need to be if you don’t keep tabs on what you owe and pay down loans efficiently. A digital tracker could be the remedy.
Take control of your finances with SoFi Coach. You can easily view all of your accounts in one convenient dashboard: bank and investment balances, current debts, spending breakdowns, and credit score. Easily set up budgets and spot upcoming bills. And get personalized insights on everyday money questions and take action with Coach chat, the AI guide that’s powered by the playbooks of SoFi Financial Planners, so its guidance comes from expert knowledge.
FAQ
What is the difference between good debt and bad debt?
Debt that allows you to build finances over time or increase your earning potential can be considered good debt. On the other hand, if debt doesn’t increase your net worth, it has no long-term value to your financial standing, and you don’t have the money to pay for it, then it qualifies as bad debt.
What are some examples of bad debt?
Credit card debt and car loans are two common types of bad debt. Credit card debt can add up because of high interest rates, and cars depreciate quickly in value.
What is an example of good debt?
A student loan and a mortgage on a house that’s expected to increase in value are two examples of good debt. Investing in education can increase your earning potential, and homes can appreciate, potentially outweighing the cost of financing.
How much debt does the average US person have?
According to 2025 Experian data, the average person in the U.S. owes $105,444 in debt. This amount has slightly increased from the previous year, when the average total balance per person was $105,056.
What is the most common type of debt in the US?
The biggest category of debt in the U.S. is mortgage debt. According to 2025 Experian data, the average mortgage balance is $260,860, up 3.3% from last year.
SoFi Coach offers users the ability to connect SoFi and external accounts using the Plaid service. When you use the service to connect an account, you authorize SoFi to obtain account information from external companies as set forth in SoFi’s Terms of Use. Based on your consent, SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without your needing to connect additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, nondelivery or failure to store any user data, the loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. Your credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
SORL-Q326-036