Many people take on debt to cover major expenses. But despite its common uses, people avoid it, mainly because of horror stories about unpaid loans, mounting interest, and financial stress.

“Debt is money that you borrow and agree to repay over time, usually with interest,” says Jensen Putra, CIMB Bank PH’s Head of Lending Products.

While debt can be risky when mismanaged, it can also be a useful tool for building a better financial future when handled correctly. The key is knowing the difference between borrowing wisely and recklessly.

When is debt good? When is it bad?

Good debts help create long-term value or improve your financial position as they may increase your earning potential over time. Examples include home, business, and education loans.

Bad debts, on the other hand, strain your financial stability and don’t offer long-term benefits. This includes borrowing beyond your capacity to repay and accumulating high-interest card balances.

“Understanding the difference between good and bad debt can help you make smarter financial decisions and use borrowing as a tool to move forward rather than fall behind,” says Putra.

It’s not always about what you buy. For example, loans used for leisure are NOT really bad if you can comfortably pay them off. These can earn you airline miles, points, or cashbacks when used properly.

Borrowing responsibly

Having access to credit doesn’t mean you should maximize it. According to Putra, your loans should only account for a portion of your monthly income.

A maximum of around 50% for those in their prime earning years, so they can focus on their future-building goals; around 35% for those nearing retirement, so they can focus on passive income-generating investments.

Before taking out a loan, ask yourself these questions:

Do I really need this?

Will this help me?

Can I repay comfortably?

PRO TIP: Choose registered and regulated lenders to avoid excessive interest rates, hidden charges, and unfair lending practices.

“Debt is a powerful tool to advance one’s life, so don’t think of it as your enemy,” shared Putra. “Always think about why you’re borrowing money and what it could potentially give you in return. The goal is not to avoid debt – it is to make sure that every peso borrowed brings you closer to your financial goals – not further away from them.”