Before incurring debt, ask yourself the following two questions.

1. Does taking on this debt offer any benefits? One might think the best advice would always be to avoid debt. Your financial situation, however, can be enhanced by good debt. A higher salary, for example, may be a result of loans taken to fund a college or graduate degree.  The benefit is tangible and long-term.

Furthermore, a mortgage for a home or rental property provides an opportunity for growth of capital and income which in turn can increase your wealth.
The potential for tax deductibility of interest on student loans and home mortgages are secondary advantages of good debt.
On the contrary, bad debt typically does not provide an advantage that can offset the strain that will be placed on your cash flow.

2. Are the benefits outweighed by the cost of the debt? As a rule, good debt should provide a return greater than the total amount paid. It is important to remember the stated price plus finance charges is the amount of your total investment.  Suppose you need to purchase a new car, for instance.  The definition of good debt would include a moderately priced vehicle financed with a short-term loan in which the car still has value upon the last payment.  Loans with longer terms of five to eight years may outlast the car and high interest rates along with the longer payback period can turn your investment into bad debt.

The same uncertainty comes with credit card debt.  It may not be a problem if you plan to pay charges in full at the end of the month.  However, charged items such as restaurant meals, vacations, or a holiday splurge get expensive once you include the interest charged to carry a balance.
Having the ability to recognize the difference between good debt or bad may improve your financial situation by way of better money management.