Between credit cards, student debt, home loans and more, there are a myriad of ways to accumulate debt (and some serious stress).

But not all debt is necessarily bad — some forms of debt are actually considered good.

"The really simple way of looking at it is: bad debt is debt that's going to cost you money," says Brenton Tong, a Sydney-based financial planner. "Good debt is debt that makes you money."

With that in mind, we've ranked six types of debt on a scale of good to bad (including some on-the-fence debt), with the help of financial planners Mr Tong, and Jenny Kam.

And, boy, did they have strong opinions, with some debt labelled "evil" and "ridiculous".

Good debt

1. Student loan (HELP or HECS)

No need to stress over HECS debt (it's considered 'good' debt). Exams are a different story. ( Unsplash: Siora Photography )

Why is it good?

Student loans are an investment in your future, potentially opening the door to more career options and higher earning potential.

They also have the best repayment terms of any loan out there.

"HECS debt is funded by the government, they're not normal loans in the sense that you don't have regular monthly payments. Your payments are based on your ability to pay it back," Brenton says.

"On top of that, it's 0 per cent interest," adds Jenny.

2. Investment/business loan

Why is it good?

These loans are generally considered good debt because they involve using money to make money.

Jenny says they're commonly used to purchase an investment property.

"A lot of people have built their wealth this way in Australia."

Such loans also help businesses expand and grow. "Provided you've got a methodical, data-driven, proven use for the funds (i.e. it's profitable), then business lending can be a very, very good thing," Brenton says.

Caveats:

It matters how you use these types of loans.

"If you're just funding a loss-making business through debt, eventually you're going to get to a point where the bank is not going to give you any more," Brenton explains.

"You won't be able to afford the repayments, and it's going to be a very brutal end to your business life."

On-the-fence debt

3. Home loan (mortgage)

A dream house can turn into a nightmare if you overstretch your finances. ( Unsplash: Jared Rice )

Why is it good?

"A mortgage buys you the house, the house stops you paying rent, it gives you somewhere to live when you hit retirement," Brenton says.

"Generally, it is neutral [debt] because it's not making you money, but it's helping you to build something of value."

Jenny says home loans are also cheaper than many other loans, with interest "around 3 per cent currently, if you get a good one."

But she also describes home loans as a "necessary evil". Why?

"In Australia, there's very little chance you can buy a home with cash outright, and therefore it's a necessity."

Caveats:

A home loan can turn into a bad debt when people overstretch themselves. Brenton says in general, your mortgage payments shouldn't consume any more than a third of your income (just like with rent).

"But people will usually push themselves to 40 or 50 [per cent of their income]," without always consider the full cost of running a house (things like council rates, insurance, repairs, etc).

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Mostly-bad debt:

4. Car loan

Why is it bad?

"Evil, terrible, ridiculous" is how Brenton describes car loans, though he concedes they can be useful in certain circumstances.

"Car loans are bad when they encourage you to overconsume."

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He says many people now use them to upgrade their car every few years. It's not a great asset to be paying interest on, given cars depreciate the moment you drive them out of the dealership.

Interest rates for car loans generally sit around 8 per cent.

Caveats:

"To some extent, these loans are a necessity," says Jenny, because some people can't afford to buy a car outright and need one to drive to work.

"If you use your car for business or work, sometimes you can claim tax deductions on it, making it slightly better."

In general, it's a good idea to pay for as much of the car upfront as you can.

Bad debt

5. Personal loan

Why is it bad?

With an average interest rate around 10 per cent, a personal loan "is usually where you end up if you have too many credit card debts [and need to] refinance that debt," Jenny says.

"In a sense, a personal loan is your get-out-of-jail card, but what that means is you should start seeking help because you have a spending problem."

Of course, people run into all sorts of problems, including illness or a job loss, which may prompt them to take out a such loan. But overall, it's usually a bad idea to spend money you don't have.

Apart from credit card debt, these loans are often used to fund things like home renovations or a holiday.

6. Credit card debt

Why is it bad?

Both Jenny and Brenton agree this is the worst kind of debt out there.

"It is the one with the highest interest. Usually it sits at 18 per cent … that is if you don't pay it off within the interest-free period," Jenny says.

"But what I get more concerned about is the spending habit it creates — it reinforces your habit of spending money before you have it."

The best way to avoid accumulating such debt? Only use credit cards as a means of transacting.

"They should never be used as an actual source of money," Brenton says.

This article contains general information only. It should not be relied on as finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.

