We asked 15 experts: Which type of debt is the worst?

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By

Hanna Horvath, CFP®

Hanna Horvath, CFP®

CERTIFIED FINANCIAL PLANNER™ & former Managing Editor, Growth

Hanna Horvath is a CERTIFIED FINANCIAL PLANNER™ and former managing editor for growth at Policygenius. She helped produce the Easy Money newsletter. She passed her exam to become a CERTIFIED FINANCIAL PLANNER™ in November 2020.

Hanna's work has appeared in NBC News, Business Insider and Inc. Magazine. She is regularly quoted in top media outlets, including CNBC, Best Company and HerMoney. She has also appeared on the Money Moolala podcast and All's Fair podcast.

Prior to Policygenius, Hanna wrote for KNBC in Los Angeles and WNBC in New York. When she isn't writing, she's (often) running, (usually) cooking and (sometimes) doing photography.

Published September 17, 2020|3 min read

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We’re taught debt is something to avoid at all costs (looking at you, Dave Ramsey). The truth? Not all debt is bad, though some debt is definitely worse than others. If you’re dealing with or considering taking on debt, it can be confusing to know where you fall on the “bad debt” ladder.

We asked 15 certified financial planners to score popular types of debt on a one-to-five scale, with five being the worst and one being the best. We added their scores to get the rankings below.

Q: Rank types of debt, from worst to best:

It’s no surprise which is the most nefarious — credit card debt. But what about other types of debt? Turns out, mortgage and student loan debt were repeatedly ranked as “better” types of debt.

Why credit card debt is the worst kind of debt

“Credit card debt is the worst since it generally has the highest interest rate and is not tied to an asset or investment.” Ryan Marshall, certified financial planner

“Credit card debt can snare people by making it too easy to spend funds you don't have. It is granted too easily and the rates often trap people.” Angela Giboney, certified financial planner

“This is the most expensive debt and most insidious because of credit card marketing. Credit cards have changed the culture of debt to make it acceptable to carry balances.” Robert Hernandez, certified financial planner

Why tax debt is worse than other types of debt

“The only way to escape the tax man is through death. If you are in this kind of debt, then something went wrong, in that you may not have put enough aside from the liquidation of an account or perhaps you underpaid and found out you owed a lot more than you thought.” Monica Dwyer, certified financial planner

“Tax debt is the one that needs attentive and urgent treatment. Tax liens are horrible and can stop you from making big transactions. You can negotiate with the IRS, which is a plus.” — Robert Hernandez, certified financial planner

“Tax debt is the worst, because the government can take a person's assets, including real estate and years of income. Often people don't realize they are incurring this debt.” — Angela Giboney, certified financial planner

Why auto loan debt is better than other types of debt

“New cars lose tons of value when they come off the lot, so aim for something reasonable and easily within your budget. Be in the habit of putting money aside for that next car down payment plus any repairs you might have on your current car.” — Monica Dwyer, certified financial planner

“Auto loans are backed by an asset you drive and are short term and are typically not the highest interest rate.” Daniel Flanagan, certified financial planner

Why student loan debt is better than other types of debt

“Studies show that degrees do increase earning potential, so at least student loan debt can be considered an investment in an intangible asset.” — Robert Hernandez, certified financial planner

“The best investment is often an investment in yourself.” — Ryan Marshall, certified financial planner

“It matters if the debt will either help or hurt the future of the client. Student loans can contribute to future wealth and happiness.” Michael Whitman, certified financial planner

Why mortgage debt is better than other types of debt

“This loan is used to help pay for the largest asset in most people’s lives. The loan interest can be tax deductible and you are building equity as the years go on.” — Ryan Marshall, certified financial planner

“This is an investment in a long-term tangible asset. Homeownership is the foundation to building wealth. The asset can be sold to repay debt, and usually the selling price is greater than the mortgage principal. If you are lucky, the sell value can be greater than total interest cost as well.” — Robert Hernandez, certified financial planner

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Image: Nastia Kobzarenko