Good debt. Bad debt. How do you tell the difference? Financial advisor Tyler Dolan helps you make sense of your debt, and find the debt payoff strategy that makes sense for your budget.

What does financial freedom mean to you?

Last year, Society of Grownups participated in a live credit chat about financial freedom with Experian, and that was our opening question. The resounding response from Grownups all over? Financial freedom equals being debt-free.

We hear you loud and clear: So many of us feel the full weight of debt on our shoulders. I get it, too: I have student loan debt and a mortgage. It can be intimidating to look at those balances.

But there’s another way to look at debt: as a tool to help reach your goals. It just has to be used responsibly.

First, though, let’s see how you’ve been managing debt so far: Do you constantly carry balances on your credit cards? (You’re not alone: The average U.S. household has over $16,500 in credit card debt.) Have you missed some of your minimum monthly payments? Have you had to dig yourself out of credit card debt? Do you have trouble keeping track of all your credit sources? Do you routinely max out your credit cards? Is your credit score lower than you’d like it to be? Have you ever been denied for any type of loan? Do you have trouble finding room for all of your minimum monthly debt payments in your budget?

Phew! I know that’s a lot of interrogation. But if you answered yes to any of those questions, it could be a sign you haven’t been great at managing debt—so far. If that’s the case, you should probably think twice about adding larger balances or more sources of debt to use. I’ve seen first hand that debt can be a slippery slope and debt repayment can be a tough mountain to climb. But don’t panic! I said tough to climb, not insurmountable. (Check out my fellow CFP® Ariel Anderson’s blog post, 5 Steps to Become Debt-Free, for more details.)

On the flip side, did you answer no to most or all of my earlier questions? If so, a pat on the back! If you don’t carry balances on your credit cards, pay your bills on time, carefully consider the pros and cons before opening a new line of credit, and have a good or excellent credit score (you can check it for free at Credit Karma), chances are you’ve been pretty good about managing your debt. You’ve shown you’re able to manage debt responsibly. That doesn’t mean, however, I’m now giving you permission to change your habits and rack up bad debt.

What’s bad debt, anyway? Simply put, it’s debt that doesn’t increase your wealth. It’s debt used to purchase goods and services with no lasting value. Take credit card debt, for example, which can carry high interest rates (averaging 14 percent, but can be much higher) and can make overspending easy.

On the other hand, mortgages and student loans can be considered good debt if used responsibly. Mortgages currently carry lower interest rates than credit cards (about 4 percent for a 30-year mortgage, but it will depend on a number of factors), and as you pay off your mortgage you’ll be building an equity stake in your home. Your student loans also carry a lower interest rate than credit cards (direct subsidized student loan rates are currently about 4 percent as well, but will depend on a number of factors too), and paying for college can be considered an investment in your future, often resulting in higher wages over your career.

Let’s crunch some hypothetical numbers: A Grownup who accrues $10,000 in bad debt at a 14 percent interest rate, for example, will pay $8,650 in interest over 10 years (or an average of $72 per month).

Alternatively, let’s assume you take out $10,000 of good debt (a mortgage or a student loan) with a 4 percent interest rate that you’d pay off over 10 years. The total interest you’d pay over that time period is $2,150, or an average of about $18 per month. Compared to the previous scenario, that’s a pretty staggering difference! No wonder people call credit cards bad debt.

If you’ve been responsible about your debt, I’m giving you permission to use debt as a tool (as long as you remain responsible). Here are five benefits to using debt:

1. It can help you reach your financial goals sooner: Think about how long it would take for someone to save $300,000 to buy a condo. In sum, this is why mortgages exist. Instead of buying the condo in cash, you shell out a down payment (typically 20 percent, or $60,000 in this case), then use a mortgage for the rest. It would take you much less time to save for the down payment than for the entire condo.

2. It can help increase your credit score: While there are many caveats when it comes to your credit score, generally, if you pay your bills on time and use debt responsibly, you’ll build your credit score over time. A higher credit score typically means lower interest rates on large purchases like cars and houses, saving you interest payments over time. (To learn more about your credit score, check out our online class Can I Have Your Number?)

3. Many offer rewards programs: You can earn airline miles, cash back, or hotel points as you make purchases on your cards. Be careful, though: Card companies are willing to offer rewards because if they offer 2 percent cash back on your purchases, but you start to carry a balance at 14 percent interest, they win…by 12 percent. (You may also want to see if these cards carry an annual fee, and if that fee is offset by the potential reward benefits.)

4. Some allow tax deductions for interest: If you have a mortgage, chances are you’re able to deduct your annual mortgage interest from your gross income at tax time. The tax savings can be pretty significant. And no, that’s not a recommendation to buy a house just for the tax deduction. (Stay tuned for our upcoming online homebuying class to learn more.)

5. You’ll get consumer protection: If your credit card gets lost or stolen, the liability to you is $50 max. If someone gets hold of your debit card or bank account number, however, your liability may be unlimited depending on your bank and how long it takes you to report it.

Another common question I hear is “should I ever pay more toward my debt”? Answer: It depends on your goals. If your goal is to become debt-free, this may be a top priority. (Our loan repayment calculator can help you determine how much to pay.)

Personally, I don’t prescribe to the idea that I have to pay off debt ASAP. I’m comfortable with the interest rates on my good debt. If I had high-interest credit card debt, I may make paying it off a priority. On the other hand, if the word “debt” makes you cringe or your debt keeps you up at night, then by all means, pay more. You’ll save money in interest over time, and you’ll pay off your debt quicker.

But remember: You don’t have to. You won’t be committing financial suicide by just paying your minimums. If you’re comfortable with that, you may actually feel a bit more freedom to save toward your other goals!

This photo shows Tyler Dolan, CFP, at Society of Grownups.

Tyler is a CERTIFIED FINANCIAL PLANNER™ practitioner who believes financial education can empower people to reach their goals.

Society of Grownups cannot guarantee and is not responsible for the accuracy of the resources, websites, or any products or services available through any third-party resources or websites.

While Society of Grownups hopes the information is useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner.

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