By Paul Feeney, Founder and Chief Executive Officer, Otivo
Good debt and bad debt are handy labels, but they're shorthand for something more useful, whether the debt is working for you or against you. Borrowing to buy something that grows in value or earns income sits very differently from borrowing to fund today's spending at a high rate. Understanding the distinction, and its limits, changes how you look at every loan. Here's what separates the two.
Quick answer
Good debt generally funds things that build wealth or produce income, such as a home or an investment, often at lower rates and sometimes with tax-deductible interest. Bad debt usually funds consumption that loses value, often at high interest, like credit card balances. As at July 2026, the distinction is a guide, since even good debt can become a problem if it's unaffordable.
What is good debt?
Good debt is borrowing that helps build your financial position over time. It typically funds an asset that grows in value or produces income, a home, or an investment, and it often comes at a relatively lower interest rate. In some cases, such as borrowing to invest, the interest may even be tax-deductible. The defining feature is that the debt is working towards something that can leave you better off, rather than simply funding spending.
What is bad debt?
Bad debt is borrowing that funds consumption, things that lose value or are used up, often at a high interest rate. Credit card balances carried month to month are the classic example, along with high-rate personal loans for discretionary spending and buy-now-pay-later balances that pile up. The problem is twofold, you're paying interest on something that isn't building wealth, and the high rate means the cost mounts quickly. Bad debt works against you rather than for you.
Why does the distinction matter?
Because it helps you set priorities. When you separate debt into what's building your position and what's draining it, it becomes clear that clearing high-cost bad debt usually deserves attention first. It also reframes borrowing decisions, asking whether a new debt is likely to leave you better off or just fund today's spending is a more useful question than whether debt is good or bad in the abstract. The labels are a lens, not a rulebook.
Can good debt become bad debt?
Yes, and this is the important caveat. Even debt that funds a sound asset becomes a problem if it's more than you can comfortably afford. A mortgage stretched too far, or an investment loan that leaves you exposed if values fall or rates rise, can turn a good debt into a source of real stress. Affordability is what keeps good debt good, so the label depends not just on what the debt buys but on whether you can carry it safely.
How should you use the distinction?
As a guide for priorities and decisions, not a strict formula. In practice that usually means clearing high-interest bad debt first, being deliberate and cautious about taking on good debt only at a level you can afford, and regularly checking that debt you consider good hasn't drifted into unaffordable territory. Used that way, the good-and-bad framing helps you make clearer choices without pretending every debt fits neatly into one box.
Frequently asked questions
Is all debt bad?
No. Some debt helps build wealth or produce income, such as a home loan or an investment loan, and can come at lower rates. What matters is the type of debt, its cost, and whether you can comfortably afford it.
Is a mortgage good debt?
A mortgage is often considered good debt because it funds an asset that can grow in value. That said, it only stays good debt if it's affordable, since a mortgage stretched beyond what you can comfortably carry becomes a problem.
Should I pay off good debt or bad debt first?
Generally clearing high-interest bad debt first makes sense, because it costs the most and works hardest against you. Lower-rate good debt that funds an asset is usually a lower priority, provided it remains affordable.
Where to from here
Seeing debt as working for or against you is more useful than the labels alone. Otivo, a licensed Australian financial advice platform holding AFSL and Australian Credit Licence No. 485665, offers a debt advice module that helps you find effective ways to pay down debt while covering essentials, based on your debts, income and expenses. It helps you tackle the debt working against you first.
Sources
- ASIC MoneySmart — types of debt and managing borrowing. moneysmart.gov.au
Disclaimer
The information in this communication is current as at July 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.