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Do you have good debt or bad debt?  Yes, there is such a thing as good debt, just like there’s good and bad cholesterol.  And you want to make sure you have the good kind.

Good debt is anything that you’ve invested in that will build value over time.  Do you own a home?  That’s good debt.  Are you paying a student loan?  That’s good debt.  So is financing a car or paying for a business loan.  You build equity in your home, your business can turn a profit, and I’ll argue that everyone needs a good education and a car.

This doesn’t mean it’s okay to run out right now and buy a mansion on the lake and a brand new Mercedes.  If you’ve bought more than you need or can really afford, it’s likely you’ll be struggling to meet your payments at some point, and your credit will take a hit.  Call it When Good Debt Goes Bad.

Not surprisingly, credit card debt is usually bad.  If you’re constantly carrying a high balance, that will dent your credit score.  If you use your credit card regularly to go clothes shopping, that’s bad debt.  You’ve already overpaid for that new shirt, and good luck selling it later at a rummage for more than a couple dollars, even if it’s designer.  Disposable items won’t build value.

Did you use your credit card to pay for your last vacation?  Bad debt.  I will be the first person to agree that everyone needs a vacation, maybe even a few, every year.  You’ll be hard-pressed, though, to convince your creditor that Hawaii was a necessary expense.  Perhaps once we’re all allowed 30 days of vacation instead of 7 or 14…

And unless you’re certain you won’t ever need your credit score again, be careful of paying off all of your debt.  No debt can actually be bad debt.  One woman I know had her high credit limit lowered because she never used it, so her score went down a bit.  Your score won’t be in danger of plummeting just because you’re debt-free, but lenders prefer to see some current activity as a way to gauge your money-management skills.  It’s similar to opening your first credit card.  You might start with a high score, but if there’s no activity to back it, lenders could still be wary of you.

But you probably have a decade or two (or three) before you pay off your house or student loan or business loan, so simply maintain you required payments and don’t go crazy spending money just because you have some extra room on your credit card.  You’ll keep your debt-to-income ratio at a good level  by not overextending yourself, and you’ll keep your debt on the good side.