Good debt vs bad debt: a simple way to tell them apart

Good debt vs bad debt: the three-question test

The good debt vs bad debt idea is useful, but it's often told too simply: "mortgages good, credit cards bad". In real life the same kind of loan can be sensible for one person and a mistake for another. A better way is to ask three questions about any borrowing.

1. Does it buy something that holds or grows value, or raises your income? A home, an education or training that leads to better-paid work, or tools for a business can all pay you back over time. A holiday, a takeaway or a new phone you didn't need won't. They're gone long before the debt is.

2. Is the rate fair? The interest rate, shown as the APR (annual percentage rate), is the yearly price of borrowing. The same purchase can be reasonable at 4% and costly at 22%. If the rate is high, even a sensible purchase can turn into an expensive one.

3. Can you afford the payments, even if things go wrong? Look at the monthly payment, not just the total. Could you still pay it if your income dropped for a few months, or an unexpected bill arrived? Debt you can only just afford on a good month is fragile.

Debt that passes all three is what people call good debt. Debt that fails all three is bad debt. Most borrowing sits somewhere in the middle, and that's where it pays to look closely.

Common types of debt, honestly

Mortgage. Often passes the test: a home can hold its value over time, you'd pay for housing anyway, and mortgage rates are usually far lower than card rates. But house prices can fall, rates can rise when a fixed period ends, and borrowing at the very top of your budget leaves no room for surprises. A mortgage is good debt only if the payments stay comfortable.

Student loan. In both the Netherlands and the UK, student loans have special terms that set them apart from bank loans:

• Netherlands (DUO): you get a two-year start period after your student finance ends, during which you don't have to repay. After that, the monthly amount is based on your income (and your partner's), called draagkracht. Under the SF35 rules, which apply if you first received student finance for hbo or university in or after 2015-2016, the repayment period is up to 35 years, and you don't pay if your repayment capacity works out at €5 a month or less. You do pay interest, fixed for five years at a time.
• UK: you repay 9% of your income above your plan's threshold (Plan 2 and Plan 5, for example; postgraduate loans are 6%). On Plan 2 the threshold is £29,385 a year; on Plan 5 it's £25,000. Earn below the threshold and you repay nothing, though interest still builds up.

That income link makes student debt much less dangerous than a personal loan. It still costs interest, and you still repay it once you earn enough, so it's worth knowing your balance and rate (both are in Mijn DUO for Dutch loans).

Car loan. A grey area. A car usually loses value from the day you buy it, so it fails the first question. But if you need a car to get to work, it supports your income. A modest car at a fair rate can be reasonable; a car that's more expensive than you need, on a long loan, usually isn't.

Credit cards. A credit card you repay in full every month costs nothing in interest and can be handy. A balance you carry month to month is usually bad debt: card rates are high, and interest is added to what you owe, then charged interest itself.

Buy now, pay later (BNPL). These schemes split a purchase into a few instalments, often with no interest if you pay on time. The risk is that they make spending on wants very easy, and missed payments can bring fees. Rules are tightening: in the UK, the FCA has regulated these agreements since 15 July 2026 when the lender is a separate business from the shop, and lenders must now check you can afford to repay. In the Netherlands, the government has announced that providers will need an AFM licence and must do a BKR check, with the new rules due to take effect by 20 November 2026.

A worked example: €5,000 at 4% vs 22%

Here's the same €5,000, borrowed over three years and repaid in equal monthly instalments. Only the rate changes.

The monthly gap is only about €43, which is why high rates are easy to accept in the shop. Over three years it adds up to more than €1,500, roughly a third of the original amount.

That's why "is the rate fair?" matters even for a sensible purchase. A loan for a training course that raises your income might pass the first question, but at 22% it costs far more than it needs to. If you have expensive debt already, our snowball vs avalanche calculator shows how attacking the highest rate first cuts the total interest.

Common mistakes

• Looking only at the monthly payment. A longer loan has smaller payments but usually costs more in total. Compare the total repaid.
• Calling a want an investment. "It'll pay for itself" is worth testing honestly. A course that leads to a better job might; a new wardrobe probably won't.
• Using a card as a buffer. Without savings, every surprise ends up on a card at a high rate. A small emergency fund breaks that cycle.
• Stacking several small plans. Three or four BNPL plans at once can add up to a large monthly bill that's easy to lose track of.
• Forgetting it shows up later. Loans and cards appear on your credit record and affect what you can borrow next, for example for a mortgage. See what a credit score is.