Good Debt, Bad Debt

Good debt buys something that grows or earns; bad debt funds something that fades. The interest rate tells you how urgent the difference is.

"Avoid all debt" is tidy advice, but it is too blunt. Borrowing is a tool, and like any tool it can build or damage depending on how it is used. A more useful approach asks two questions of any debt: what does it cost, and what does it buy?

Good debt is usually cheap and tied to an asset or to higher future income. A home loan at a modest rate buys a place to live and, often, an appreciating asset. A loan that funds a qualification or a business can lift your earning power for decades. The borrowing is doing work that, over time, more than covers its cost.

Bad debt is usually expensive and funds consumption that loses value. A credit-card balance at around 26% a year (typical Singapore rate, June 2026), or a loan for a depreciating want, takes money out of your pocket while giving nothing back that grows. The interest compounds against you on something already worth less than you paid.

The two questions interact. Cheap debt against a growing asset can be sensible; expensive debt against a fading purchase rarely is. And almost no investment reliably beats the ~26% you save by clearing a credit-card balance — which is why paying off bad debt is one of the highest, surest returns available.

Illustrative example: sorting debt on two axes

The chart maps borrowing by interest rate and by whether it builds an asset. The dangerous corner is high-rate debt funding things that lose value; the benign corner is low-rate debt behind something that grows. Clear the top-right first, and borrow deliberately in the bottom-left.