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Is all debt truly harmful, or can some of it help you achieve your retirement goals? Not all debt carries the same weight. While it’s important to reduce your expenses, certain debt can help boost your flexibility and security in retirement.

In this episode of Money Wisdom, Jake Doser, CFP®, CPWA® and Nicholas J. Colantuono, CFP® explain how knowing the difference between good debt and bad debt can change your financial outlook.

Good vs. Okay vs. Bad Debt

When you consider debt from a cost perspective, there are three general categories: good, okay, and bad debt. Debt with a 4% interest rate or less is generally good debt. Between 4% and 6% carries some risk, but the payments are still manageable.

Once interest rates rise above 6%, it moves into bad debt territory. At that point, the cost of borrowing often exceeds what you could earn from long-term investments.

Good Debt: A Mortgage

Now, let’s categorize different types of debt based on what you’re buying. A mortgage, or a home loan, finances an appreciating asset, making it a more constructive form of debt than a car loan. However, paying off debt doesn’t automatically fix every financial issue. If your monthly spending is too high, being debt-free still doesn’t mean you’re living within your means.

At the same time, don’t let old rules of thumb that you shouldn’t have a mortgage in retirement dictate your financial decisions. If your mortgage is affordable, has a low interest rate, and offers a tax deduction in retirement, it can be good debt to keep.

Bad Debt: Credit Cards

Most debt used to finance purchases that don’t provide long-term value is considered bad debt, especially with higher interest rates. This often comes from credit cards, with the average American carrying around $6,500 in outstanding balances.

Remember, minimum payments are typically just 1.5% to 3% of your credit card balance. Most of what you pay goes toward interest rather than principal. In many cases, high credit card debt is more of a spending problem than a debt problem.

Smart Habits to Adapt

Good debt can always turn bad if not managed responsibility. Having the right mindset around debt means being proactive by improving your credit score and building an emergency fund. Make it a priority to review your budget, spending habits, and retirement income sources with a financial professional.

Your advisor can help you determine which debt to pay first, how to balance debt repayment with saving, and how to protect your credit.

Are you wondering if you’re ready to retire? Get your free Are You Ready to Retire? Starter Kit by texting “KIT” to 800-757-0436.