Understanding good debt vs bad debt could be the first move toward making clearer, more confident financial decisions.
If you’re aiming to grow wealth, make smarter property moves, or simply get your money working for you, knowing how to strategically use debt can make a real difference.
As a wealth coach working with Australians just like you, I’ve seen firsthand how the right debt, used at the right time, can unlock new financial possibilities, while the wrong kind can quietly drag you backwards.
In this guide, Bullet Proof Wealth will explain the differences between a good debt and a bad debt, highlight common traps to avoid, and help you use good debt to grow your wealth with clarity and confidence.
What Sets Good Debt Apart from Bad Debt
Let’s keep it simple. Good debt is money borrowed to build value or create future income. Bad debt is money borrowed for things that depreciate quickly or don’t deliver lasting value.
In other words, good debt helps you move forward financially. Bad debt often holds you back.
For example, a mortgage on an investment property in a growing suburb can be considered good debt. But a high-interest credit card balance for a new TV? That’s typically bad debt.
The difference isn’t just what you borrow for. It’s also about the interest rate, how manageable the repayments are, and whether it aligns with your long-term goals.
To help you identify what kind of debt you currently have, we’ve put together some good debt vs bad debt examples below. Seeing how these play out in real-life scenarios can make it easier to assess which debts may be supporting your goals, and which might be holding you back.
Types of Good Debt That Build Wealth
If you’re wondering what is good debt, it’s the kind that supports your future. It often comes with lower interest rates, potential tax deductions, or helps you buy appreciating assets. Here are six good debt examples commonly seen in Australia, each with the potential to support long-term wealth building:
1. Home Loans on Owner-Occupied or Investment Properties
Property is a cornerstone of Australian wealth-building. A mortgage on a home you live in or rent out can be a highly effective form of good debt, especially in markets with long-term growth potential. In many cases, the equity you build through property ownership can later be used to fund renovations, investments, or other financial goals.
2. HECS-HELP or Other Education Loans
Education debt, especially through the government’s income-contingent repayment scheme, can improve your lifetime earning potential without high upfront costs. Since repayments are tied to your income, this type of debt is typically manageable and doesn’t accrue interest in the traditional sense.
3. Business Loans Used Strategically
Borrowing to expand or improve a business can lead to increased revenue, provided the loan is part of a clear growth plan. When used to invest in equipment, staff, or marketing that boosts profitability, business loans can offer strong long-term returns.
4. Refinanced or Consolidated Debt
Rolling high-interest debts into a lower-rate home loan or personal loan can be smart if it reduces your monthly outgoings and frees up cash flow. It may help simplify your finances by cutting down your repayments and making everything easier to stay on top of.
5. Investment Loans
Borrowing to invest in shares or property (with professional advice) may be suitable if you have the income and risk tolerance. Negative gearing, for instance, may offer tax benefits in certain situations. Be cautious and informed.
When used responsibly, investment loans can amplify your returns, but they require discipline and a clear risk management strategy.
6. Interest-Free or Low-Interest Finance (With a Plan)
Some retailers or lenders offer interest-free terms. Used wisely and paid off within the period, this can be a cost-effective way to spread payments. However, it’s important to stay within your budget and avoid extending repayment terms beyond the interest-free period, which could negate the benefit.
Now that you’ve seen how good debt can support your goals, it’s just as important to recognise the kinds of debt that may quietly limit your progress.
Types of Bad Debt That Hold You Back
If you’re trying to understand what is bad debt, it’s generally any borrowing that doesn’t support your future goals. It often carries high interest, funds unnecessary purchases, and can quickly become unmanageable. Here’s what to be careful of:
1. Credit Card Debt
With average rates above 19% in Australia, credit card balances that aren’t paid off monthly can snowball fast. Even small purchases can become disproportionately expensive if balances linger month after month.
2. Buy Now Pay Later (BNPL) Services
Even with no interest charged, missing payments or overusing these services could still lead to fees or hurt your credit score. ASIC has warned that over 20% of users cut back on essentials to meet repayments. The convenience of BNPL can sometimes lead to impulse spending that wouldn’t happen with cash or debit.
3. Personal Loans for Holidays or Gifts
Short-term joy, long-term cost. If it doesn’t add value to your financial future, it may not be worth borrowing for. These debts often come with little to no return on investment, making them hard to justify when money is tight.
4. Auto Loans on New Cars
Cars lose value quickly. If you’re borrowing for a vehicle, consider a modest, reliable model rather than something that stretches your budget. Many new cars depreciate by as much as 30% in the first year alone, while your loan balance barely moves.
5. Payday Loans
High fees and interest can trap you in a cycle that’s hard to break. These loans are often used for emergencies, but there are safer alternatives. The short repayment window and compounding fees can quickly lead to a situation where you’re borrowing just to repay existing debt.
6. Store Credit Cards
These often come with higher-than-average interest rates and deferred payment tricks that can catch you off guard. Promotional offers may appear attractive, but often include clauses that lead to retroactive interest if not paid off in full.
When Good Debt Turns Bad
You might be wondering, when can good debt be bad? Even the most strategic loan can become a burden if misused or left unmanaged. Watch out for these red flags:
● Taking on more debt than you can realistically repay without strain
● Taking on multiple debts with overlapping repayments
● Using a business loan without a clear return plan
● Relying on future assumptions (e.g. pay rise or market growth) to repay
● Missing scheduled repayments or falling into arrears
Debt is only good when it’s helping you move forward, not adding stress or limiting your options.
Why Debt Quality Matters
In Australia, different types of debt can either support your long-term plans or slow you down. When you understand the type of debt you have, you can:
● Prioritise repayments more effectively
● Make smarter decisions about refinancing or consolidating
● Free up your borrowing capacity for strategic investments
● Reduce financial stress and gain more control
Debt doesn’t have to be a burden. With the right mindset and support, it can be a stepping stone to long-term security.
Debts That Aren’t Clearly Good or Bad
Some debts aren’t clearly good or bad. For example:
● A car loan may be necessary if you rely on a vehicle for work.
● Moving costs or relocation loans could lead to better income in the long run.
● Education loans may be good or bad depending on job prospects and repayment pressure.
If the debt has a purpose and a pay-off that benefits you long term, it may be worth considering. The key is intention and strategy.
So how do you decide which debts to tackle first? Let’s walk through that next.
Which Debts to Pay Off First
To make headway, start by focusing on the highest-cost and least-beneficial debts first. You could:
● Use the “avalanche” method: Pay off the highest interest rate debt first
● Or the “snowball” method: Pay off the smallest balances first for momentum
● Prioritise non-deductible debts: Like credit cards or personal loans over tax-deductible investment debt
● Check your loan contracts: For exit fees or interest penalties
● Keep emergency savings: So you’re not forced to borrow again during a crisis
A wealth coach can help you map out the right approach for your situation, especially when juggling multiple debt types.
Smart Ways to Avoid Bad Debt
Here are practical ways to steer clear of unhelpful debt:
● Make purchases with a long-term mindset
● Avoid impulse borrowing for non-essentials
● Build a savings buffer for emergencies
● Read the fine print before signing up for “interest-free” deals
● Compare rates and features using ASIC’s MoneySmart loan guides
● Stick to a monthly budget and track spending patterns
● Seek professional guidance before taking on large loans or complex structures
Avoiding bad debt is often about slowing down and asking, “Does this really serve my future?”
Steps to Get Out of Bad Debt
If you already have debt that’s weighing you down, you’re not alone. Here’s what you can do:
● Speak to your creditors to negotiate better terms
● Consider consolidation through a lower-rate personal loan or home equity
● Work with a wealth coach to create a debt-reduction plan
● Use budgeting tools or apps to stay accountable
● Reach out to a financial counsellor via the National Debt Helpline for free support
● Limit new credit applications until existing debts are under control
● Celebrate small wins, progress builds confidence
Kiyosaki’s Take on Good vs Bad Debt
In Rich Dad Poor Dad, Robert Kiyosaki suggests that good debt can help generate income, while bad debt often drains it. While this perspective has merit, in Australia, things are a bit more complex due to our tax rules, lending standards, and housing market conditions.
For example, using equity from a home loan to invest might be suitable for some but risky for others. That’s where tailored advice becomes essential.
Take Control of Your Debt
Debt doesn’t have to feel like a burden. When used with purpose, debt can become a practical tool for building wealth and achieving your goals. But the line between helpful and harmful debt can be thin, and that’s where personalised guidance matters.
As an experienced wealth coach, I can help you:
● Review your current debts
● Create a repayment and refinance strategy
● Identify smart, goal-aligned borrowing opportunities
● Navigate the property and lending landscape in Australia with clarity
If you’re ready to turn debt into a lever for financial freedom, business scale, or a more intentional lifestyle, book a consultation today. Let’s build a plan that’s clear, empowering, and built around your future.
Frequently Asked Questions (FAQs)
1. What if I’ve got a mix of good and bad debt? Where do I start?
It’s completely normal to have a combination of both. The key is to first understand which debts are costing you the most in interest and stress. Bad debts, like high-interest credit cards or payday loans, often take priority because they can snowball quickly.
From there, you can look at ways to refinance, consolidate, or restructure your remaining loans to better suit your financial goals. A wealth coach can help you work out a repayment plan that frees up cash flow without adding more pressure.
2. Is buying a car ever considered good debt in Australia?
That depends on the purpose, loan structure, and your long-term plans. Cars generally depreciate in value, which is why car loans are often classed as bad debt.
But if you need a reliable vehicle for work, and the repayments are affordable within your budget, the debt might be justifiable. Choosing a modest, fuel-efficient model and avoiding over-financing could make it a more manageable and lower-risk type of debt.
3. Can good debt still hurt my credit score?
Yes, it can, if it’s not managed properly. Even good debt like a home loan or student loan may negatively affect your credit score if you miss repayments, exceed your credit limits, or apply for too many loans in a short period. Staying organised with your repayments, setting reminders, and checking your credit file regularly can help protect your credit standing while using debt to build wealth.
4. What should I do before taking on an investment loan?
Before committing to any investment loan, it’s essential to run the numbers. Make sure the potential returns outweigh the costs, including interest, fees, and risk exposure. It’s also worth checking your borrowing capacity, understanding the tax implications (especially around negative gearing), and reviewing your cash flow buffer.
Speaking with a financial adviser or wealth coach who understands the Australian lending environment can help you approach it with a clear plan.
5. I’ve consolidated debt before but still feel stuck. What’s next?
Consolidating debt can be useful, but it won’t solve everything on its own. If you’re still feeling overwhelmed, the next step might involve reviewing your overall money habits, setting realistic budgeting goals, and creating a debt reduction strategy that’s more tailored to your lifestyle.
Sometimes it’s about more than just the interest rate. It’s about mindset, spending triggers, and having someone in your corner to guide you. A coach can help you shift from just surviving debt to actively growing your wealth.
