Is your debt ‘good’ or ‘bad’? It depends

Are student loans good debt that can lead to a career or an insurmountable burden? Is credit card debt a sign of reckless spending, or can it be a smart way to cover an expense? In general, what makes debt good or bad is how it fits into your financial picture.

Good debt is manageable and can help you achieve goals. Bad debt can overwhelm your finances.

Ask yourself these questions:

What led to the debt?

“Any debt that is taken on because people don’t have any kind of choice means they are starting out in a place of disadvantage,” says Ida Rademacher of the Aspen Institute. “That can create a spiral that can prevent people from being resilient.”

Conversely, she says, “the more helpful forms of debt can help people become more resilient.”

Student loans, for example, may enable a career that offers a high salary, making you more financially sound.

Was the debt taken on to achieve a long-term goal? For convenience? In an emergency?

Debt to achieve a goal or for convenience can be useful as long as you have a plan for paying it off. To avoid desperation debt, build an emergency fund.

Can you afford it?

Comparing debt versus gross income can help you see if it’s manageable. Ignoring mortgages and student loans, here are some guidelines:

A debt load of up to 15% of income may be affordable but is worth addressing. From 16% to 39%, debts become increasingly burdensome; you should consider a personal loan or credit card balance transfer. Above 39%, it’s time to talk with nonprofit credit counselors, and perhaps bankruptcy lawyers.

How is life affected?

Debt doesn’t have to rule your life. If you’re feeling overwhelmed, take steps to resolve your obligations.