Good vs bad debt - when should you borrow or pay?
Some borrowing can actually help you build wealth or achieve important goals, while other types can leave you worse off and stressed about repayments.
So what’s the difference between ‘good’ and ‘bad’ debt – and how do you know when it makes sense to borrow?
What is good debt?
Good debt is borrowing that can improve your long-term financial situation, increase your earning potential, or help you acquire an asset that is likely to grow in value.
Examples include:
- Mortgages: Property is typically seen as a long-term investment and mortgages are a classic good debt. Mortgages are secured against property, often come with relatively low interest, and you build equity as you repay. Over time, capital growth usually means your net worth rises.
- Student loans: Graduates in England earn on average £11,500 more per year than non-graduates, according to the Department for Education. Taking out a student loan can therefore be seen as an investment in future earning potential.
- Business loans: Borrowing to fund a business that has strong potential to generate income and grow can also be classed as good debt.
Good debt usually comes with relatively low interest rates, a clear repayment plan, and the potential to improve your financial future.
What is bad debt?
Bad debt is borrowing that costs you more in the long run without providing real benefits or increasing your wealth.
Examples include:
- High-interest credit cards: The average credit card interest rate in the UK hit 24.66% in January 2026, the highest for over 30 years, according to NimbleFins analysis of Bank of England data. Carrying a balance at that rate can quickly snowball into unmanageable debt.
- Payday loans: With annual percentage rates (APRs) that can run into the hundreds or even thousands, these short-term loans can trap borrowers in cycles of repayment.
- Borrowing for depreciating items: Using credit to fund holidays, gadgets or clothes is risky, as these purchases lose value quickly and don’t generate future income. Therefore you’re wasting money on interest on something you don’t need.
- Bad debt often has high interest, no long-term benefit, and can damage your credit score if repayments are missed.
How much debt do UK households have?
The average UK household debt (excluding mortgages) stood at £18,392 heading into 2026, according to NimbleFins research. That figure includes credit cards, loans, overdrafts and other unsecured borrowing.
UK households with mortgages held around £197,811 in mortgage debt on average in 2025.
While not all debt is ‘bad’, it highlights the importance of borrowing responsibly and distinguishing between necessary and unnecessary debt.
When should you borrow – and when should you pay it off?
Borrow when:
- You’re investing in something that will improve your financial future (education, a home, or starting a business).
- The interest rate is affordable and fixed.
- You have a clear repayment plan and room in your budget.
- The loan offers flexibility, such as the option to make overpayments without penalty or pause repayments if needed.
Read more: How to choose the best credit card for you
Pay off debt when:
- The interest rate is high (e.g. credit cards, payday loans).
- The debt isn’t tied to a valuable asset.
- You have spare income that could save you money by clearing the balance early.
- The repayments limit your ability to save for emergencies or invest elsewhere.
- Extra charges (e.g. annual fees, payment protection add-ons) make the debt more costly than expected.
- It’s damaging your credit score or leaving you reliant on short-term borrowing to keep up.
Borrowing money isn’t always a bad thing - in fact, it’s often essential for achieving life goals like buying a home or studying for a degree. But recognising the difference between good and bad debt is crucial.
If you are struggling with repayments, free help is available from charities such as StepChange or National Debtline. Note: the concepts discussed here reflect broad financial education, not specific advice for an individual person. Every situation is different.
Read more: