Good Debt, Bad Debt and What Each Does to Your Net Worth
See how mortgages, student loans, car loans and credit cards each affect your net worth, and a clearer test than 'good' or 'bad' for judging any loan.
You’ve probably heard that some debt is “good” and some is “bad”. Mortgages and student loans go in the first group; credit cards and payday loans in the second. It’s a useful shorthand, but it’s too blunt to make decisions with. A mortgage on a house you can’t afford isn’t good, and a 0 percent loan you pay off on time isn’t really bad.
A better way to think about debt is to look at what it does to your net worth, both the day you take it on and over time. This guide walks through how that works, with examples for the most common kinds of household debt.
Borrowing doesn’t change net worth on day one (usually)
When you borrow money, you get cash or something worth roughly the same amount, and you owe the loan. Assets and liabilities rise together.
Borrow $10,000 in cash and your net worth is unchanged: +$10,000 in the bank, +$10,000 owed.
What happens next is what matters:
- If the money buys something that holds or grows in value, your net worth can rise over time.
- If it buys something that loses value quickly or is used up, your net worth falls, while the debt remains.
- Interest reduces net worth every month you carry the balance.
A clearer test than “good” or “bad”
Instead of labelling the type of debt, ask four questions about the specific loan:
- What does it buy, and what will that be worth later? An appreciating asset, a depreciating one, or nothing lasting?
- What does it cost? The interest rate and fees, and the total you’ll repay.
- Does it raise your income or lower your costs? Education or a reliable car to get to work might.
- Can you comfortably afford the payment with room for emergencies?
A loan that does well on all four is the kind people mean by “good debt”. One that fails most of them is the kind to avoid or pay off first.
How common debts affect net worth
Mortgages
On the day you buy, a house worth $350,000 with a $280,000 mortgage adds $70,000 of equity (your deposit) to your net worth. Then buying costs, such as closing fees, usually reduce it a little.
Over time, three things move your equity:
- Each payment’s principal portion reduces the mortgage and raises net worth.
- The interest portion is a cost that doesn’t build anything.
- The home’s value may rise or fall with the local market.
Early in a typical long mortgage, a large share of each payment is interest. Over the years, the share going to principal grows. A mortgage can be one of the more reasonable debts to carry, but only if the payment fits the budget comfortably. Equity that depends on house prices rising isn’t guaranteed.
Student loans
Education doesn’t appear as an asset on a personal balance sheet, so student loans make your net worth negative on paper, sometimes for years. That’s normal and doesn’t mean the loan was a mistake. The payoff, if there is one, shows up in income rather than assets.
The questions to ask are about the rate, the repayment terms, and whether the qualification raises earnings enough to justify the cost. Repayment and forgiveness rules vary by country and lender and change over time, so check the current terms for your loans.
Car loans
A car is a depreciating asset. A $30,000 car might be worth $24,000 after a year, while the loan balance may still be $25,000 or more. That’s negative equity: the loan costs you net worth twice, once through interest and once through depreciation.
A car loan can still make sense if you need the car to earn a living and the payment is modest. It works best with a decent deposit, a short term and a reliable car you plan to keep.
Credit cards
Carrying a balance on a card is usually the most expensive debt a household has. The purchases are often things that are used up, such as meals, travel and clothes, so there’s no asset to offset the debt. And interest is charged on the full carried balance every month.
A card you pay in full each month isn’t really debt in this sense. It’s a payment method with a monthly bill.
Buy-now-pay-later and payday loans
Buy-now-pay-later plans can be interest-free if paid on time, but late fees and the ease of stacking several plans can add up. Payday loans tend to carry very high costs. Both usually fund spending rather than assets.
A worked example: two households, same income
Both households take on $40,000 of new debt.
Household A borrows $40,000 as part of a home purchase. They pay $3,600 a year in interest and $2,400 a year in principal. The home’s value stays flat in this example.
Household B borrows $25,000 for a car and puts $15,000 on credit cards over a couple of years. The car loses $4,000 a year in value. Interest across the loan and cards comes to about $4,500 a year, and they pay down $3,000 of principal.
After one year, the effect on net worth from the debt and what it bought:
| Household A | Household B | |
|---|---|---|
| Change in what was bought | $0 | −$4,000 (car depreciation) |
| Interest paid | −$3,600 | −$4,500 |
| Principal paid (debt reduced) | +$2,400 | +$3,000 |
| Cash used for principal | −$2,400 | −$3,000 |
| Net change | −$3,600 | −$8,500 |
Principal payments don’t change net worth by themselves; they swap cash for less debt. What reduces net worth is interest and loss of value. Household A loses only the interest. Household B loses interest and depreciation, and the card spending bought nothing that remains.
The figures are simplified, but the pattern holds: the same amount of debt can cost very different amounts depending on what it buys and what it costs.
Which debt to pay down first
If you have several debts and some spare money, two common approaches are:
- Avalanche: pay extra on the highest-interest debt first. This usually costs least in total.
- Snowball: pay off the smallest balance first for a quick win, then roll that payment into the next.
Either way, keep up the minimum on everything. Before paying extra on low-rate debt like a mortgage, many people first build an emergency fund and clear high-rate debts. If you’re struggling to keep up with payments, a non-profit credit counsellor or a qualified financial professional can help you work through the options.
Seeing debt in your net worth
Tracking each debt as its own account makes the effect visible: the balance falls with each principal payment, and your net worth rises by the same amount. In Kemback, loans and credit cards are accounts like any other, the overview shows your net worth, and the net worth report charts it over time, so paying off a card shows up as a clear step up the line. Whatever you use, listing every debt with its rate next to it is the first step to deciding which one goes first.
This article is general information, not financial, tax or legal advice. For decisions about your situation, talk to a qualified professional.
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