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Your Credit Score: Good Debt vs. Bad Debt

Written by Equifax Experts on October 28, 2013 in Credit  |   29 comments

The types of accounts in your credit file impact your credit score, so it’s important to understand the differences between “good” and “bad” debts. Learn how types of debt differ, and how you may change your bad debt into good debt.

your-credit-score-good-debt-vs-bad-debtIt can be difficult to pay for everything in cash. Buying a home and paying for college, for example, are hefty investments that will likely require you to take on debt by borrowing money now and paying it back later.

Your borrowing history—the type of debt you’ve acquired and how you’ve paid it back over time—is listed in your credit report and impacts your credit score, but not all debt is created equal. By understanding the distinction of good debt vs. bad debt, you will be on your way to using credit responsibly and improving your creditworthiness over time.

What is good debt?

Good debt is often considered to be an investment in something that creates value. A mortgage or student loan, for example, can be considered good debt—especially if your home’s market value increases over time or your college education helps you land a good job that pays the bills.

Generally, any debt can be classified as good debt as long as you are able to pay it back on time each month, making at least the minimum payment. Your payment history is the largest factor that influences your credit score—accounting for about 35 percent of your score. As a result, consistently keeping up with your payments can help you raise your credit score over time.

This means you might have to make some tough decisions about how much debt to take on and where to most economically use it. Taking out a home equity line of credit to add another bathroom to your house, for example, may be a better investment than running up your credit card debt to pay for fancy dinners and lavish vacations.

What is bad debt?

In general, bad debt is any debt you take on to fund a lifestyle you can’t afford, and it usually causes you to sacrifice long-term financial health for short-term gratification. Any debt can quickly become bad debt if you overextend yourself or fall behind on your payments.

You can quickly rack up bad debt if you are using a high-interest credit card and not paying the monthly balance in full or if you take out a loan with monthly payments you can’t meet. If are able to comfortably afford the monthly payments on a $15,000 auto loan, for example, be cautious of overextending yourself by taking out a larger loan.

Debt that uses up too much of your available credit can also be considered bad debt. About 30 percent of your credit score is determined by the amount you owe on your credit cards and loans or your ratio of debt to available credit.

Keeping your ratio of debt to available credit as low as possible can usually reflect positively on your credit history and credit score. If you carry a balance of more than 30 percent of your credit limit, lenders may consider it excessive debt and view you less favorably.

How can I turn my bad debt into good debt?

In order to get your credit accounts under control and to improve your creditworthiness, consider minimizing the amount of new debt you take on while you work on paying off the debt you currently have. By paying down your debt gradually over time, you may positively impact your credit score.

In addition, responsibly using the credit you’ve already been extended and applying for new credit only when necessary can help you show lenders that you are a creditworthy consumer.

You can’t improve your credit history and credit score overnight, but if you create a budget to pay down your debt—and you stick to it—your bad debt may start to look like good debt.

The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.


  1. Steve Haskell says:

    This sounds good but according to my score, it probably isn’t true. I owe money on my house and two credit cards. I have no late payments anywhere on my credit report. On one of the credit cards, I pay the total balance monthly and on the other I owe 10k. The 10k credit card has been close to 2k in the last 6 or 8 months. And I pay wy more than the minimum on a monthly basis. I have about 10 other credit cards with zero balance. My home debt is about 70% of its value. No late payments. I have bad debt of $39 to a health org that won’t take the payment. My credit score is 699. This means that 60% of Americans have a better credit score than me. According to the article above, I should have good credit but my score doesn’t reflect the same. The politicians call me a 1%er and yet my credit score is far below the average. There is something seroiusly wrong with this system and the credit agencies are getting paid to report and represent my credit. Shame Shame.

    • Lenny M. says:

      I am in same boat! I have lots of cards and none is even remotely close to max and I pay 5 to 10 times min every month and my score is only 699 also. After my divorce 10 years ago though, my score was in the 400s.

  2. Anonymous says:

    I have several low credit limi credit cards ($300 – $1200)and making it difficult for me to obtain higher credit limite cards. I thought of paying them off and cancell them but am afraid it amy have negative impact on my score. What is your advice?.

  3. Warrior53 says:

    While there is a lot of merit to this article, and it is true in every regard, the financial industry does not particularly have your best interest in mind. One misstep is a seven year punishment, taking 84 never late monthly payments to erase one late payment. Wanting to buy that next car? Shop around, let several dealerships run your credit, even before you arrive at a final deal. One or two won’t kill you, but be careful of going to several dealerships – tell them, when they get your info off your DL for the test drive, “Do NOT run my credit!” Save that for when you have a deal and need to arrange financing (or arrange for it in advance). Every run beyond the first few makes you look like you are “looking for credit” – assumed to be a bad thing when you are really just trying to buy one car.

    And as for credit cards….. they are all designed to take money from you. Whether it’s high fees or high interest, or both. How come you can buy a car at 2.5%, or finance a house at 3-5%, but to use a credit card to buy a $25 shirt, you pay 24-29% interest. Best advice I’ve found is keep one card with a fairly high credit limit. Use it sparingly to keep your account active, and pay it off the next billing cycle. It’s a good cushion in the event of an emergency, and you need spending power quickly. If you are really disciplined, get a rewards credit card (miles, cash back, etc), use it for everything to get points, and pay it off immediately. Everything else is cash or debit (be careful with that PIN number, use it like a credit card so no PIN use). Mainly, don’t carry a balance.

    But remember, like Vegas wasn’t built on the backs of winners, the credit industry is betting that you will make a late payment, over extend yourself, and make a mistake that will justify them considering you a poor credit risk and doing all they can to squeeze every last bit of penance out of you. It’s counter-intuitive for them to charge you low rates. So the system is designed to trip you up easily, and then dig a hole quickly that you can’t get out of without years of diligence and effort.

    • Pax PFM says:

      Warrior53, on your second point about too many inquiries on someone looking at your credit report. If a person is shopping for “like type” installment loans (like a car) those would be counted as one as long as they are within the certain time span (normally 14-25 days). Stick with looking for a loan within two weeks and you should be fine.

      • no name jane says:

        Pax – your statement that “same type” credit searches in a short time only count as one, is not always true. I wanted to purchase a foreign vacation/flight package on one credit card instead of spreading it across two. I asked a particular very large bank credit card to raise my limit back to what it was a couple of years ago prior to my asking them to lower it to reduce risk. The clerk looked at some data (don’t know what as I have a very high credit score) and said no. I appealed to the supervisor and she said “no”. The next day I called back and ask for a manager, ask her to look at my payment and past limit history. She said it was OK but turned me down because there were 3 inquiries for credit within the past week per the credit bureau. Thus, she turned me down. I told her that all three credit inquiries came from her organization. I just dropped that card and got another company to handle my request.

  4. Mark Hrozenchik says:

    Fundamentally, there is no difference in what type of debt you take on – credit card, student loan, mortgages; either or any of them can be good or bad debt. The best way to finance anything is save the money and pay for it in cash. Hard, perhaps even impossible to do with a house, for example, but that’s about the only true debt you need to take on. Build the “emergency” fund, and leave it alone; that’s your credit card right there.

    What would be really useful, is if Equifax told us how each debt affected our credit rating; then, we could increase our credit ratings much more efficiently, rather than play these guessing games . . . .

  5. E. BATTICE says:


  6. Alfred K. Moorehead says:

    This was(is) good advice. It is to bad that for profit Company’s ,like Equifax, will not provide some relief for people who shown that they are credit worhty afted 30-36 months of corrective action(s).

  7. Anonymous says:

    If you have approx $3000 in cash and one credit is $2900 but another credit card is $6000 and it has a higher interest rate and monthly payment and the balance owed is more than 30% of the limit. Should I pay off the credit card with the $2900.00 balance? Or Should I pay moines toward the credit card with the $6000 balance as mentioned above.

  8. Robert says:

    I have worked in banking for more than 20 years and am also a CPA who advises clients on personal debt. While I understand the logic described in this article, the assumption that credit bureau companies use is sometimes flawed. Years ago, due to my good credit record of never making a late payment, I was offered low fixed rate options for transfers on several of my cards. In each case, the fixed rate was for the life of the transfer and under 5%, which was less than some of the installment loans I made for what the credit bureau would call “investment” purchases. I refinanced other credit card and installment loans on those cards, and actually still have a balance on some. I made a choice to carry those balances rather than pay them off. And, from the perspective of the credit bureau, my risk was higher and my credit score was lower. This flawed logic may apply to some, but certainly not all, consumers. And, because the credit bureau companies hold a relative monopoly on consumer finance, I just had to deal with it. I have recently gotten a new job and make a lot more money. I have been able to pay some balances off and my credit score has improveded, but because I still carry some balances at a fixed rate of 2%, my score is not as high as it should be. Ironically, until recently, I knew some people that recently declared bankruptcy that had credit scores equal or higher than mine. The algorithms are flawed for some, including me, and it is very frustrating!

  9. Emmanuel says:

    Creating and maintaining a budget is key

  10. Mary says:

    Thiswas excellent advice!!! I have been systematically working on improving my credit score, by making timely payments. I have seen a significant increase in my credit score the last eight months.

  11. Jeff says:

    With speaking with someone from Equifax it was suggested to get credit cards to increase credit score, yet one takes a hit on our score on trying to do just that, is this not ” a oxy moron’ as we say.

  12. Anonymous says:

    I have found that paying off debt can often reduce your credit score. For example you purchased a car several years ago and have made payments on time all along. When you pay off that loan it can actually increase the ratio of debt to credit because the scoring matrix recalculates your debit to credit limit ratio by dropping the debt that was paid off and then recalculating using newer debt. The result, the ratio of the debt you have to the amount used goes up. This is a flaw in the system that punish the folks who pay off debt.

  13. Anonymous says:

    Interesting….I have a charge card, only purchased small itemsand then paid it off every month.I recently needed a car battery, so I purchased that,and a few other items.Have made double the minimum payment for several months,and just got a letter where my credit rating had been lowered. I wont even waste my time with posting what else is on my mind.What do the “spin doctors”have to say about this?

  14. Anonymous says:

    can you show me the right format of letter for contesting my credit to send to the credit bureas.

  15. jesse williams says:

    can you show me how to contest my credit

  16. Tracie says:

    Good info to know

  17. Damon says:

    Good info!

  18. Anonymous says:

    On my credit report I have credit cards that show available credit but I never use them. I heard if you start closing accounts it negatively impacts your credit score. I have about seven accounts that are quite old and there is no balance I would like to close them. What do you advise?

  19. Lillian says:

    I am just pleased that the Chapter 13 is paying something to my accounts. It is ironic that I am paying on my bills while sending funds to Chapter 13. My credit score should be good soon, right?

  20. JAL says:

    I had two medical bills go to collections. I have since paid both of them, but they still show as open accounts on my credit report. Why aren’t collection agency’s required to report when accounts are paid in full?

  21. paniful ears says:

    The big 3 credit bureau practices are very convoluted and very much not “pro consumer.” Half of their respective “counselors” are not trained or authorized fully by which I mean, do not either have the complete knowledge of exactly what and what actions determine credit to debit ratio, and how the scores are really truly effect an individuals. Add in the “rules” under which they are “authorized” to be able (not) to support a person and how many upper levels one must be sent is absolutely criminal. I have no problem personally, nor have I with my credit score or any account I have own, but I know how it works and trust me – the entire game is criminal, at best. If you don’t like your situation, please remember we live in a democracy and unless you participate (which is a requirement of a democracy) by contacting your elected leaders again and agin holding their feet to the fire, spreading the word that we need something fixed – you have nothing to gripe about. SOmething needs to be fixed – WORK on it!

  22. anonymous says:

    I have a credit score Of 7.8 my home is paid off my car is paid off and have 0 balance on my credit card why isn’t my credit score an 8.5 i’ve been debt free for 3 years. I don’t understand why my credit score is 7.8 im 40 yrs old and i have never had a late credit card payment plus I pay my credit cards off each month.

  23. Mark Robinson says:

    Very useful information. I also turn my bad debt into good debt. I took student loan $20K for my car and I pay it off in 2 years decently by reducing my extra spending and I always keep eyes on my debt. This will help me in debt repayment. Thanks

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