Debt: the good, bad and necessary
Good debt can build wealth

A record high balance of credit card debt is a sign that American consumers are living well outside their means. As a nation, the Federal Reserve says we've amassed $800 billion in credit card debt, and that figure continues to climb.

Mike Sullivan, director of education for Take Charge America, a national non-profit credit counseling agency, says Americans have become consumed with "bad" debt.

"There is good debt and bad debt. Good debt ultimately leads to greater wealth, and bad debt can possibly lead to financial disaster," he said. "Learning to decipher between the two is vital to maintaining a healthy financial life."

According to Sullivan, good debt includes items that you need, but can't afford to purchase upfront - at least without wiping out cash reserves or liquidating investments. In cases where debt makes sense, consumers should only take loans for which they can afford monthly payments. On the other hand, bad debt, which usually comes in the form of high-interest credit card debt, accumulates when a consumer purchases items that they don't need and can't afford.

Sullivan offers examples to help you sort out the good, bad and necessary sides of debt:

Good Debt: 1. Mortgage

A mortgage loan is an example of good debt. It generally has a low interest rate, and the value of the home will likely increase throughout the life of the loan, often substantially in the long run.

2. Student Loans

A college education is pricey, but it significantly boosts lifetime earnings. Therefore, student loans can help increase the likelihood that you will make more money as you advance your career.

Bad Debt: 1. High-Interest Credit Card

This is the worst kind of bad debt, and it causes millions of people financial stress on a daily basis. According to the credit card industry, the average American household that has at least one credit card is carrying more than $9,000 worth of high-interest debt, which doesn't include mortgages.

2. Auto Loans (Bad Side)

An auto loan is bad when it is used to buy "too much" car. Remember, as soon as you purchase a vehicle, its value decreases. So, just because you qualify for a loan that enables you to purchase a luxury vehicle, that doesn't mean you should do so if you will struggle to meet monthly payments and cause a financial pinch in other aspects of your life.

Necessary Debt: 1. Auto Loans (Necessary Side)

Some bad debt can be necessary debt. For instance, a vehicle is necessary for certain jobs, especially in communities not set up for easily accessible public transportation. An auto loan can provide you with a means to get to work. However, it is vital that drivers use auto loans to purchase a car within their budgets.

2. Medical Bills

Medical problems are unfortunate life circumstances that often occur unexpectedly. It can turn into bad debt, and it must be dealt with in order to prevent serious financial strain.