According to the Federal Reserve Bank of New York, U.S. household debt reached a record $18.2 trillion in early 2025—yet not all of it is dragging people down. While some view debt as an enemy to be eliminated, others see it as a lever for financial progress. This article explores when debt can be a tool for wealth building—and when it becomes a trap.

Key Takeaways

• Not all debt is harmful—some can accelerate long-term wealth if tied to appreciating or income-generating assets.
• Credit card balances and auto loans can often carry high costs with little financial upside.
• Education, real estate, or business debt can be constructive—when structured and managed thoughtfully.
• The key risk lies in overleveraging or misunderstanding repayment timelines, interest rates, or opportunity costs.
• Strategic debt use requires aligning terms with personal cash flow, time horizon, and the likelihood of asset appreciation.

Debt Isn’t the Enemy—Bad Strategy Is

Many investors grow up hearing that all debt is bad. The idea is simple: owing money equals risk. But this blanket belief overlooks the financial upside of borrowing for the right reasons.

• Hypothetical: Imagine a person in their late 20s weighing a $60,000 graduate degree. Paying in cash would deplete their emergency fund and prevent them from investing. Taking a 5% federal student loan, meanwhile, allows them to retain liquidity and potentially boost earnings by six figures over time. The loan isn’t free—but it might be the smarter choice.

This doesn’t mean all student loans are worthwhile. But when used strategically, debt can enable access to education, real estate, or entrepreneurship— often with returns that outpace the borrowing cost.

Why Credit Card Debt Rarely Pays Off

Unlike student loans or mortgages, most credit card debt doesn’t fund long-term assets. It typically covers short-term consumption: dining out, travel, unexpected expenses.

According to the Federal Reserve, average credit card APRs reached 21.37% in early 2025. That’s a hurdle rate many investments can’t beat. Even worse, minimum payments barely chip away at the balance, increasing the chance of compounding interest and missed payments.

For this reason, many financial strategies prioritize paying down high-interest revolving debt before considering new investments or borrowing.

When Real Estate Debt Makes Sense

Real estate is one of the most common uses of strategic debt—and one of the most misunderstood.

While mortgages can build equity and offer tax benefits, they also come with hidden costs: property taxes, maintenance, insurance, and opportunity cost on the down payment. Still, when structured properly and held over time, home loans may help build net worth.

For a hypothetical example, a 30-year mortgage fixed at 5.5% may look expensive, but if a home appreciates by 3–4% annually and provides housing utility, the long-term gain can offset the interest—especially when compared to renting in high-cost markets.

The key is whether the property fits into an investor’s broader financial picture: does it allow for portfolio diversification, sufficient liquidity, and risk-adjusted growth?

Small Business and Entrepreneurial Debt

Debt also plays a critical role in business formation—especially for small enterprises that lack venture capital access.

SBA loans, equipment financing, or business lines of credit can provide a runway for operations, hiring, or inventory. However, they come with repayment expectations regardless of revenue.

• Hypothetical: Consider a solo entrepreneur who takes a $75,000 loan to launch a specialty food business. If their cash flow forecast is solid and the business scales within two years, the debt may be the catalyst that fuels long-term growth. But if sales stagnate or margins shrink, fixed loan payments could cause personal financial strain.

Debt’s value depends on use, not presence.

Debt and Behavioral Finance: The Emotional Cost

Beyond numbers, debt has an emotional dimension. Many investors experience anxiety, shame, or denial when managing loans—especially if repayment feels overwhelming.

Behavioral studies show that people might often focus on the total amount owed, rather than the structure or timing of payments. This can lead to avoidance or suboptimal decisions—such as paying off low-interest debt before high-interest balances.

To mitigate this:

• Prioritize debt with the highest interest rate
• Consider consolidation for simplicity or lower rates
• Align payment schedules with income stability
• View strategic debt as a tool, not a failure

So what: Debt doesn’t inherently destroy financial freedom—it’s how it’s structured, used, and emotionally framed that makes the difference.

Debt Isn’t a Signal of Failure—It’s a Financial Choice

The presence of debt isn’t a red flag. What matters is its purpose, structure, and how it fits into a broader plan. Borrowing to acquire appreciating assets, invest in human capital, or grow a business isn’t reckless—it’s strategic.