Good Debt vs Bad Debt: Do You Know The Difference?

When you hear the word “debt,” chances are your stomach clenches a little. But not all debt is a disaster waiting to happen. In fact, some types can actually help you get ahead if used the right way.

For young Australians trying to juggle study, work and saving for the future, understanding the difference between good and bad debt can help you make smarter money moves. Let’s unpack what separates the two, with examples and tips to keep your finances on track.

What is good debt?

Generally the kind that helps you build something valuable over time. Whether that’s boosting your earning power or growing your wealth, it’s debt that gives you a return on your investment.

HECS-HELP (Student Debt)
If you’ve studied at university or TAFE, you might already have a HECS-HELP debt. This is often seen as good debt because education can lead to higher-paying jobs over time. Plus, repayments only kick in once your income hits a certain level, and there’s no interest—just inflation-based indexation. Still, it’s worth knowing what you owe and keeping an eye on those annual increases.

Home Loans
Taking out a mortgage to buy a home can also fall under good debt, especially if property values rise over time. You’re building equity in something that could be worth more in the future, unlike rent, which just disappears each month. Just make sure the loan fits your budget so it doesn’t become a burden.

Business or Investment Loans
Borrowing money to start a business or invest in assets like shares or an investment property can be a smart move, so long as you’ve done your research. If that borrowed money is helping you grow your income or assets, it’s working in your favour.

What is bad debt?

The kind that costs you more than it gives back. It usually funds things that lose value quickly or aren’t essential. It’s easy to fall into, especially with all the tempting options out there—but it can quickly pile up and limit your financial choices down the line.

Credit Cards
Used responsibly, credit cards can offer perks like rewards or convenience. But if you’re only paying the minimum or missing repayments, interest stacks up fast—sometimes over 20 percent. Suddenly, that $200 dinner becomes a $300 regret. If you can’t pay it off in full each month, it’s best to steer clear.

Buy Now, Pay Later (BNPL)
Afterpay, Zip and similar services are hugely popular, but they’re still a form of debt. They make it easy to overspend without realising how much you’re committing to. Miss a payment and you’ll likely get hit with late fees, and the debts can add up across multiple platforms. Lenders now consider BNPL debts when assessing home loan applications.

Car Loans for Flashy Rides
Need a car to get to work? Fair enough. But borrowing big for a brand-new set of wheels, especially one outside your budget, can end up costing you far more than the car is worth in a few years. Cars depreciate fast, so taking on large loans for non-essential models is usually not worth it.

Lifestyle Loans
Taking out personal loans for holidays, weddings or the latest phone might feel justifiable, but these purchases usually don’t bring lasting value. Once the event’s over or the item’s outdated, you’re left paying off a memory—not an asset.

How to manage debt smartly

No matter what kind of debt you have, the goal is to stay in control—not the other way around. Here are some practical ways to keep your debt healthy.

Know What You Owe
Make a list of all your debts, including how much you owe, the interest rate and repayment schedule. It’s easier to tackle a problem you can actually see.

Tackle High-Interest Debt First
Focus on repaying the debts that are costing you the most, like credit cards or payday loans. Paying them off faster saves you money in the long run.

Avoid Borrowing for Non-Essentials
If you don’t have the cash for it now, ask yourself: do I really need it? Saving up instead of borrowing might take longer, but it won’t come with added interest or stress.

Budget for Repayments
Factor debt repayments into your monthly budget. Don’t rely on memory—set reminders or automate payments to avoid late fees.

Ask for Help Early
If you’re struggling to keep up, don’t ignore it. You can talk to your lender about hardship arrangements, or speak with a free financial counsellor. Services like the National Debt Helpline are there to help, not judge.

Final thoughts

The line between good and bad debt isn’t always black and white—it often comes down to why you’re borrowing and how you manage it. If the debt helps you get ahead financially, builds an asset or increases your income, it’s likely on the good side. But if it’s fuelling impulse purchases or costing you more than it’s worth, it might be time to rethink.