You know what a credit score is and what affects it. But those scores are used to get debt. Now let's explore a powerful idea: not all debt is created equal.

Some debt can help your financial future, while other debt can hurt it. The key is knowing the difference.

Engagement Message

Can you think of debt that might actually be considered "good" for someone?

Good debt typically helps you build wealth or increase your earning potential over time. It's an investment in your future that pays you back.

Good debt also usually comes with lower interest rates and potential tax benefits.

Engagement Message

Give one big purchase that could go up in value over time.

Bad debt, on the other hand, doesn't improve your financial situation. It often comes with high interest rates and is used for things that lose value quickly.

Credit card debt from shopping sprees is a classic example of bad debt.

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What purchases do you think would be considered "bad debt"?

Let's look at good debt examples: mortgages help you own a home that can appreciate in value. Student loans can increase your earning potential through education.

Business loans can help you generate income. These debts often pay for themselves over time.

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Which example—mortgage, student loan, or business loan—seems most relevant to you?

Bad debt examples include high-interest credit card debt for vacations, expensive cars with long loan terms, and payday loans.

These purchases don't increase in value and often cost much more than their original price due to interest.

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What's the main difference you notice between good and bad debt examples?

Here's a simple test: ask yourself "Will this debt help me build wealth or earn more money in the future?" If yes, it might be good debt.

Also consider the interest rate - good debt typically has lower rates than bad debt.

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Using this test, is a car loan for commuting good or bad debt?

Remember, even "good debt" can become bad if you take on too much. A mortgage is good debt, but borrowing more than you can afford makes it dangerous.

The key is being strategic about when and how much you borrow.

Engagement Message

What's one question you should ask before taking on any new debt?

Type

Sort Into Boxes

Practice Question

Let's practice identifying good vs. bad debt. Sort these common types of debt into the correct categories.

Labels

• First Box Label: Good Debt
• Second Box Label: Bad Debt

First Box Items

• Mortgage for a house
• Student loan for a degree
• Small business loan

Second Box Items

• Credit card for vacation
• Payday loan
• Loan for a luxury car