What Makes Debt Good or Bad
Debt is often lumped into a single category, but the reality is more nuanced. Kirang Gandhi, Director at Kaarmika Wealth Mentors, stresses that the label “good” or “bad” depends on *why* you borrow and *how* you can repay it. A home loan that funds a property you can afford is generally considered good debt, whereas a credit‑card balance that erodes savings can become bad.
Practical Rules to Gauge Affordability
Ananth Shroff, Co‑founder and CEO of DPDZero, offers a simple benchmark: total EMIs should not exceed 40‑50 % of net monthly income. However, he cautions that this ratio alone is insufficient. Two borrowers with identical percentages may have very different capacities to absorb credit stress, depending on the stability and quality of their income.
Shroff also highlights the importance of looking at the *whole* debt picture. A single home‑loan EMI may seem manageable, but when combined with car loans, personal loans, BNPL and credit‑card obligations, the cumulative burden can become overwhelming. Easy access to credit across apps and platforms can gradually push borrowers past their personal threshold without them realizing it.
Early Warning Signs of Debt Stress
Borrowers need to spot trouble before it turns into a missed payment. Shroff identifies three red flags:
1. **Using one line of credit to repay another** – borrowing through a card or app to pay off a different debt. 2. **Consistently making partial or minimum payments** on revolving credit instead of clearing the balance. 3. **Rapidly increasing the number of active credit accounts** – opening several new lines in a short span may indicate financial strain.
Recognising these signs early can help borrowers adjust their repayment strategy or seek professional advice.
Bottom Line
The distinction between good and bad debt is not a binary one. It hinges on purpose, cost, and the borrower’s ability to repay comfortably. Before taking on any loan, ask:
- Why am I borrowing? - What will the total cost be? - Can my monthly cash flow absorb the repayment? - Will I still manage if my income fluctuates?
Smart borrowing is about aligning credit with realistic repayment plans, not avoiding debt altogether.