4 Ways to Make Debt Your Friend Instead of Your Frenemy
Debt can actually be a helpful tool, provided you understand the difference between good debt and bad debt and use it to optimize your financial strategy.
At the end of 2025, Americans carried a record $18.8 trillion of household debt. While interest rates have ticked lower, a 30-year mortgage is hovering around 6%, and credit cards charge over 20% on average.
Debt is a reality for the vast majority of Americans, making Debt Awareness Week (March 16-22) a good time to remember that, for most of us, the goal shouldn't be "no debt," but rather, making sure your debt is working for you.
That's because while debt can certainly be problematic, it's not inherently good or bad. It's best viewed as a tool that can help optimize your financial strategy.
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An auto loan may allow you to buy a car that you need to drive to a job, a business loan could lead to building a successful business, or you could strategically use leverage to gain tax benefits.
How do you keep debt a friend and not an enemy? Here are some tips to help make sure your relationship with debt stays healthy.
1. Know the difference between 'good debt' and 'bad debt'
Debt can be good or bad based on its characteristics and how it's used.
Is it affordable or expensive? Look at your interest rate to figure out how much it's costing you. Higher rates (especially those above about 8%) are more likely to be bad debt, while lower rates tend to be good debt.
How much do you have? In general, lenders like to see debt payments including a mortgage be less than 35% of your monthly gross income, and debt payments without a mortgage be less than 20% of your monthly gross income.
If your debt payments are straining your budget or lenders are wary of lending you money, it's a sign you have bad debt.
What are you using it to buy? If you're using debt for everyday expenses like eating out frequently or vacations you otherwise couldn't afford, you might be fueling a lifestyle out of reach rather than improving your financial situation.
A good use of debt is to buy things that help you generate income (like that car that gets you to work) or for things likely to grow in value (like a business or home).
Considering using this week to inventory your debt (type, amount outstanding, interest rate, payment) and determine how much falls into the good vs bad categories.
2. Optimize any debt you have
Now is a great time to check in on whether your existing debt is optimized, which won't reduce the amount of debt you have, but it could reduce your payments or interest owed.
There are three optimization strategies.
- Refinancing debt. Paying off an existing debt using new debt of the same type that has different terms, such as refinancing a mortgage or auto loan
- Swapping debt. Paying off an existing debt using new debt of a different type that has different terms, such as using a home equity loan to pay off credit card debt
- Consolidating debt. Paying off multiple existing debts using new debt to combine several payments into one, such as consolidating federal student loans)
To make the most of these strategies, you'll generally need to have a good credit score.
And before you move a balance, you should consider any associated fees, the change to the total interest you'll pay over the life of the loan, new terms and conditions and the impact on your credit score.
When optimizing debt, it can be especially helpful to work with a trusted professional like a financial adviser, who can also help you avoid any bad actors looking to take advantage of individuals who have debt.
3. Know when to pay down debt … and when not to
First things first: Always make your minimum payment.
If you're wanting to pay down debt faster because you have problematic debt or simply because you're debt-averse, you might be tempted to put every spare dollar toward paying down debt. But that's not always the best use of your surplus.
For example, if you have nothing in your emergency fund, you might want to prioritize that until you have at least a few hundred dollars or one months' worth of expenses. That way, if an unexpected expense pops up, you're not immediately going back into debt to afford it.
Alternatively, if your debt has a low interest rate, such as a 3% mortgage, you might get a better return on your money by investing it.
Once you determine how much extra you do want to put toward paying down debt, there are largely two strategies for prioritizing which debts to tackle first:
- The avalanche method, where you pay debt with the highest interest rate first
- The snowball method, where you pay debt with the lowest balance first
There are very strong opinions about which of these is best. While we advise starting with the highest-interest debt, paying off small balances can be very motivating for some. Ultimately, you should do what works best for you.
4. Use debt strategically
While many of us need debt to buy a home or car, as wealth increases, it becomes more of a choice. At this point, it can help you build your assets while also potentially providing tax benefits.
If the alternative is selling assets to fund an investment opportunity or make a purchase, you might want to consider whether borrowing would be more advantageous.
For example, selling an asset often comes with a tax consequence. You may owe capital gains tax on a stock sale, and it can be substantial if you have a low-basis investment.
Or you might have to pay income tax if withdrawing from a pretax retirement account. A loan may allow you to stay invested and defer the tax consequence of selling.
Another example is if you own an illiquid asset, which might come with substantial selling costs that a loan could let you avoid.
Using debt responsibly should help you meet your financial goals, rather than hinder them. And Debt Awareness Week is the perfect time to take stock of how debt is — or isn't — working for you.
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- I'm a Financial Professional: Here Are Four Ways You Can Use Debt to Build Wealth
- How to Use Good Debt (While Identifying and Avoiding Bad Debt)
- A Financial Expert's Three Steps to Becoming Debt-Free (Even in This Economy)
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