When you start to study to topic of debt management, you’ll notice that some financial experts refer to “good” debt and “bad” debt, and others simple throw all debt into one category. Is there such a thing as good debt, and if so, how can you make sure that your debts are of the right kind? When you see debt as either good or bad, you’ll begin to realize that you can make smart choices when it comes to debt. Smart choices lead to a better financial position, which can help you free yourself from bad debt.

A simple definition of good debt is this: good debt is any form of debt that gives you money back. Don’t confuse this with credit cards with a cash back reward. Good debt is something completely different. This type of debt allows you to purchase assets which will put money in your account long after you make the purchase.

For example, purchasing a piece of equipment for your small business is a good debt investment. The rise of franchise opportunities nationally makes this probably the most common example when discussing what is involved in good debt investment. The equipment will help you do your business more quickly, which can lead to faster profits. Even though you are going into debt to purchase it, it will pay off in the long run.

Another example of good debt is investment in property. Buying a house is probably the most amount of debt that the average person will carry in their lifetime. But a mortgage loan can allow you to earn money in the future. If you purchase a house for $180,000 and it is worth $250,000 in five years, your debt has actually allowed you to make money. Good debt investments can also include stocks, shares, coffee franchises, restaurant franchises, art and even rare comic collectible items.

Bad debt, on the other hand, ends up costing you money in the long run, instead of helping you earn it. A prime example of this is credit card debt. Credit cards are a surefire way to put yourself into a financial bind. For every $1.00 you spend on a credit card, you’ll end up spending $5.00 to $7.00 just to pay it back. Interest rates, late fees and other miscellaneous charges make credit cards one of the worst investments available.

Credit cards aren’t the only type of bad debt that is used too frequently. If you pay attention to commercials for furniture and appliance stores, you’ll notice another form of bad debt. The loans offered by these types of stores look attractive first. Most offer a period of time with no interest or payments. However, these terms allow you to get used to not paying for your purchases. When the payments are finally due in two to three years, your purchases aren’t brand new any more, but you’ll be paying more than new prices thanks to interest rates.

When you look at your debt load, try to split it into the two categories of “good” and “bad.” If you have a lot of bad debt and not much good, it’s not an excuse to go out and dig yourself further into debt. Rather, it’s a wake up call that you need to reduce your bad debt now so that in the future you’re able to invest in property or other items that will give you good debt.