Good Debt or Bad Debt?

By: Staff

4 Min Quiz

Rebecca uses a credit card for most of her purchases, but pays off the full balance each month.

If Rebecca pays her credit card off in full each month, she is not being charged interest on her purchases. The value of her purchase stays the same, making this a good debt.

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Ted, a college student, carries a balance on his credit card and only pays the minimum amount due each month.

Since Ted only pays the minimum balance on his card each month, the remaining debt will be charged interest, decreasing the value of his purchases and making this a bad debt.

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Sarah has $20 in her purse, but she chooses to use a credit card to buy her lunch burrito.

If Sarah does not pay her credit card balance in full, she will end up paying significant interest on her burrito that she could have paid cash for. With interest, her burrito will cost more, making this a bad debt.

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After experiencing a medical emergency, Chuck paid his hospital bill with a credit card.

Financing a necessary purchase that you can't afford, like a medical emergency, is considered good debt. But only when you have no other options to pay.

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Susan needed some cash, so she took out a cash advance on her credit card.

Cash advances often have even higher interest rates than purchases you make on the credit card, so it's always a bad debt.

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Megan increased her monthly payment by $1,000 to own a home instead of renting one.

Only if Megan can keep up with the increase in her monthly payments will her home purchase become a good debt.

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Jerry is refinancing his home mortgage.

Refinancing a mortgage is a good debt, because it lowers your interest rate, as long as you don't take out cash at the closing.

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Julia bought a home by putting the minimum down and can barely afford her monthly payment.

Home mortgages are usually considered good debt. However, if Julia cannot afford the payments, her home mortgage may turn into a bad debt.

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Tom took out a home equity loan for a home improvement project.

As long as the home project increases the value of his home, this is a good debt.

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Taylor received a bonus at work and invested it in a high-return stock market account.

Investing extra money in a high-return, reliable stock market account is always a good debt.

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Denis cashed in his 401K to invest in a high-risk stock.

Cashing in a 401K early is rarely a good idea, because fees taxes, and penalties will significantly decrease its value. To top it off, Denis is investing the remaining cash in a high-risk venture, making this a hands-down bad debt.

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George decided to buy a $60,000 car, although he can only afford a $20,000 car.

Since cars decrease in value over time and high interest rates add to the purchase price, this is a bad debt.

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Jeff just bought a jet ski because there was a zero down promotion sale.

Zero-down purchases usually have high interest rates, which decrease the value of the purchase, making this a bad debt.

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Sally is trading in her SUV for a used, more fuel-efficient sedan.

Although cars are usually bad debt, trading in an SUV for a fuel-efficient car can decrease your monthly expenses and increase your total worth, making the purchase a good debt.

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Sue and Henry need to take out a loan to afford their exotic honeymoon.

Taking out an unnecessary loan on anything and paying interest is a bad debt.

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Mark and Jan just took out a loan to put their son in a private vocational school.

Education increases a person's value, making this a good debt.

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Ryan doesn't have enough cash to make it to pay day, so he decides to take out a payday loan.

Extremely high interest rates and hidden fees make payday loans bad debt.

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Robert plans to propose to Rachel next month, so he takes out a loan to buy an engagement ring.

Although he will pay interest on his purchase, the engagement ring will likely increase in value over time, making this a good debt.

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Ken applied for a student loan so he can go attend college after high school.

Attending college will increase the salary Ken may earn upon once he graduations, making student loans a good debt.

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Although she's not sure what type of work she wants to do, Laura is passionate about reading and takes out a student loan to go back to school for her doctorate in literature.

No matter what the degree someone earns, further education always increases a person's value and is considered a good debt.

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Image: refer to hsw

About This Quiz

The mere mention of the word debt is enough to send some consumers running. But, did you know that there is actually such a thing as good debt? See if you have a good grasp on the difference in our good debt vs. bad debt quiz.

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