What is debt?

Understanding debt

Debt is when one party accepts goods or services with the promise to pay the lender later. In return, the lender can charge you interest or fees.

There is typically some sort of written agreement or contract stipulating the terms for repayment, including whether any interest will be charged and the amount. Interest typically depends on your creditworthiness, which is the likelihood that you will repay as promised.

Legal definition of debt

“The term ‘debt’ means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.”

- U.S. Code

Some common types of debt include credit cards, mortgages, personal loans, car loans and student loans. Debt can support you during many milestones in life, helping you buy a house or pay for higher education.

How debt works

Debt works by letting you borrow money with the agreement to pay it back later, usually with interest. It can be owed by an individual (personal or consumer debt) or by an organization like a business or the government.

When you borrow money, the amount you receive is called the principal. Your balance includes the principal plus any interest and fees. Some debts are repaid in one lump sum, while others are paid off over time in installments.

The terms of your loan or credit agreement outline important details like the payment schedule, minimum payments and whether the interest rate is fixed or variable.

Some lenders offer perks for borrowing, such as credit card rewards. But if you miss payments or borrow more than you can afford, you could face penalties like late fees, a lowered credit score, debt collection or even the loss of your assets. Always review the terms carefully before borrowing so you can be sure you’ll be able to repay what you owe.

Good debt vs. bad debt

There is both good debt and bad debt, and knowing the difference between the two is key to building good credit.

Good debt improves your financial standing, helping you build credit to become a more trustworthy borrower. It can also help you build wealth, such as allowing you to buy a house that grows equity over time or get a college degree that leads to higher income.

Bad debt is the opposite. It doesn’t improve your financial standing and can instead bury you in a sea of high interest rates and fees. This kind of debt often comes from unnecessary purchases and offers no return. One example of bad debt is credit card debt, which often carries high interest rates that do nothing but put you further in debt.

» LEARN: How much debt is too much?

Types of debt

There are many different types of debt that can be used to support you through many milestones in life, like getting a degree, purchasing a home or paying off emergency medical bills.

Some common types of debt include credit cards, mortgages, personal loans, auto loans and student loans.

The Federal Reserve Bank of New York’s 2025 Household Debt and Credit Report breaks down U.S. household debt by category:

U.S. debt by type

There are four main types of consumer debt:

• Secured debt: Secured debt uses collateral to support the loan. Should you fail to repay the debt as agreed, your lender takes the collateral for payment. Home mortgages and car loans are examples of secured debt.
• Unsecured debt: Unsecured debt isn’t backed by collateral. This kind of debt tends to carry higher interest rates to compensate for the additional risk taken on by the lender. Examples include credit cards, personal loans and student loans.
• Installment debt: Installment debt pays funds in one lump sum upfront and then is paid back over a set period with fixed payments.
• Revolving debt: Revolving debt gives you a line of credit that you can reuse as you pay it off. Like installment debt, it carries interest that you must repay.

Examples of secured and unsecured debt

Managing debt effectively

Managing debt effectively means understanding your repayment terms and staying consistent, but that can be easier said than done.

As Harold Wenger Jr., partner and wealth manager at Kingsview Partners, put it: “The goal isn’t to crush debt overnight — it’s to stop it from quietly crushing you.”

Regardless of the type of debt you have, you should be prepared to pay it off according to the terms of your agreement. The following strategies can help:

• Create a budget. One way to manage your money is to create a budget that outlines your debts and expenses. This gives you a clear picture of what you owe and helps you control your spending. Consider using a budgeting app to stay on track.
• Use a debt payoff strategy. There are several strategies you can use to pay off your debt. One popular example is the snowball method, which pays off your debts according to size, starting with the smallest and working up to the largest. If you prefer to tackle your largest debt first, try the avalanche method.
• Get a debt consolidation loan. If you have multiple types of debt, consider a debt consolidation loan. This type of loan can combine all your debt into a single loan with a potentially lower interest rate and just one monthly payment.

» COMPARE: Best Debt Consolidation Loan Companies

Wenger also said, “Debt management isn’t about perfection. It’s about progress with a plan — and sticking to it even when Amazon is whispering your name.”

If you need more guidance, a financial advisor or credit counselor can help you build a realistic, long-term plan.

The national debt

Even the government has debt; in fact, the national debt is $36 trillion. This number reflects the amount of money the U.S. federal government has borrowed for expenses over a set period of time. When a budget deficit arises from excess spending over revenue, the federal government sells marketable securities to cover the balance. These come in the form of securities like Treasury bonds, bills, notes and Treasury inflation-protected securities.

This debt, plus the interest owed to the investors who purchase the securities, makes up the national debt.

Securities are largely considered safe investments for risk-averse investors because, as the U.S. government notes, it has never defaulted on its obligations.