What Are The Differences Between Good And Bad Debt?
Updated for 2026
Understanding the differences between good and bad debt is one of the most important steps you can take towards better financial health. Not all borrowing works against you. Some forms of debt, when managed carefully, can strengthen your financial position, while others can drag you into a cycle of repayments that becomes difficult to escape.
In this guide, we break down what separates good debt from bad debt, give you real examples of each, and explain what options are available if bad debt has become unmanageable.
What Is Good Debt?
Good debt is borrowing that helps you build long-term value or improve your financial standing. The key feature of good debt is that it works in your favour over time, whether by increasing your net worth, boosting your earning potential, or helping you improve your credit score.
When lenders see that you can manage debt responsibly, it opens up access to better interest rates and more favourable borrowing terms in the future.
Examples of Good Debt
Mortgages: Taking out a mortgage to buy a home is one of the most common forms of good debt. Property tends to appreciate in value over time, so you are building equity with each repayment. A mortgage is a type of secured loan, meaning the property acts as collateral. If your credit score improves during the mortgage term, you may be able to remortgage at a lower rate.
Student loans: Borrowing to fund higher education is generally considered good debt because it increases your earning potential. In England and Wales, student loan repayments only begin once your income exceeds the repayment threshold set by the Student Loans Company, currently £25,000 per year for Plan 2 loans (2025/26 tax year). This makes it a relatively low-risk form of borrowing.
Business loans: If you have a solid business plan and realistic financial projections, borrowing to start or grow a business can be a sound investment. The income generated by the business should, over time, outweigh the cost of the loan.
Credit builder cards: Using a low-limit credit card specifically designed to build your credit history counts as good debt, provided you make every payment on time and in full. Even small, regular purchases paid off monthly can steadily lift your score. Late or missed payments, however, will have the opposite effect and could cause your credit score to decrease.
What Is Bad Debt?
Bad debt is borrowing that does not increase your net worth or generate income, and typically comes with high interest rates that make the total cost of borrowing far greater than the original amount. Bad debt often accumulates when there is no clear repayment plan in place, or when borrowing is used to fund lifestyle spending rather than investments.
Examples of Bad Debt
High-interest credit cards: Credit cards with an APR of 20% or more can quickly make debt unmanageable. If you only make the minimum payment each month, interest compounds and the balance grows. According to the Financial Conduct Authority, UK consumers owed over £58 billion in outstanding credit card debt as of late 2025.
Payday loans: Payday loans are designed for short-term emergencies but carry extremely high interest rates. If you cannot repay the full amount on your next payday, the debt snowballs rapidly. The FCA has capped the cost of payday loans at 0.8% per day, but even with this cap, borrowing £300 for 30 days would cost you £72 in interest alone.
Car finance on depreciating vehicles: A brand-new car loses a significant chunk of its value the moment you drive it away. Taking out a high-interest loan to finance a vehicle that depreciates quickly means you could end up owing more than the car is worth, a situation known as negative equity.
Buy now, pay later schemes: These have surged in popularity across the UK. While they can be interest-free if repaid on time, missed payments can result in late fees and negative marks on your credit file. A 2024 report by Citizens Advice found that one in four BNPL users had struggled to make a repayment.
Store cards: Store credit cards often carry much higher APRs than standard credit cards, sometimes exceeding 30%. The initial discount offered at sign-up rarely justifies the long-term cost if a balance is carried over.
How to Tell the Difference Between Good and Bad Debt
A simple test is to ask yourself: will this borrowing put me in a better financial position in the future? If the answer is yes, and you have a realistic plan to make the repayments, it is more likely to be good debt. If the borrowing funds something that loses value quickly or comes with punishing interest rates, it leans towards bad debt.
Other factors to consider include:
- The interest rate: lower is almost always better. Compare the APR before committing.
- Your ability to repay: can you comfortably meet the monthly payments without cutting into essentials?
- The purpose: does the borrowing fund an asset that appreciates (property, education) or something that depreciates (electronics, clothing)?
- The total cost: factor in interest over the full term, not just the monthly amount.
What to Do If Bad Debt Becomes Unmanageable
If you are struggling with bad debt, you are not alone. Millions of people across England and Wales face debt problems every year, and there are formal solutions designed to help.
An Individual Voluntary Arrangement (IVA) is a legally binding agreement between you and your creditors, managed by a licensed Insolvency Practitioner. It allows you to repay what you can realistically afford over a fixed period, typically five to six years, with any remaining unsecured debt written off at the end. An IVA also provides legal protection from creditor action, meaning no more threatening letters or phone calls while the arrangement is in place. You can learn more about the protections on our IVA protection guide.
If your debt level is lower, a Debt Relief Order (DRO) may be more suitable. As of 2026, you can apply for a DRO if your total qualifying debt is under £50,000, your disposable income is no more than £75 per month, your assets are worth less than £2,000, and your vehicle is valued at under £4,000.
For free, impartial guidance, organisations such as MoneyHelper and StepChange offer confidential debt advice at no cost.
Managing Good and Bad Debt: Practical Tips
Whatever your current situation, these steps can help you stay on the right side of borrowing:
- Create a monthly budget that accounts for all debt repayments before discretionary spending.
- Prioritise paying off high-interest debt first, sometimes called the avalanche method.
- Avoid taking on new debt to pay off existing debt unless you are consolidating at a genuinely lower rate. Our guide to debt consolidation myths covers common pitfalls.
- Check your credit report regularly through Experian, Equifax, or TransUnion to spot errors and track your progress.
- If debt is affecting your wellbeing, speak to a professional. Debt and mental health are closely linked, and support is available.
Get Help With Bad Debt Today
If bad debt is weighing you down and you want to explore your options, Swift Debt Help can point you in the right direction. We provide general information on debt solutions available in England and Wales, including IVAs, DROs, and bankruptcy.
This article is for general information purposes only and does not constitute financial advice. If you need personalised guidance, please consult a qualified financial adviser or contact a free debt charity such as StepChange or MoneyHelper.
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