Good vs Bad Debt

Paying off debt can feel like a weight has been lifted off your shoulders. Here are some tips and strategies to help you enjoy that debt-free feeling.

Good debt vs bad debt

Not all debt is equal. Before you can work out how best to deal with your debts, make a list and identify whether they are good or bad debt.

Purchasing cars, holidays and clothes might feel good, but they rarely provide a future financial benefit (unless you have a thing for vintage Rolls-Royces). Borrowing money or buying things on your credit card is considered bad debt because you can’t reclaim any of the interest you pay and it’s not going to make you money.

However, when debt is used to purchase an asset that can increase in value or generate income, it can be good. For example, if you borrow to purchase an investment property, the interest you pay on the loan can often be claimed as a tax deduction while the investment may also increase in value over time.

Free yourself from debt

It’s easy to get overwhelmed by debt and it can be hard to see a way out. Here are 3 steps that could help get you back on track.

1. List out your debts including their interest rates, minimum repayments and whether they are good or bad debt.

2. Put your debts in order from the highest to the lowest interest rate.

3. Start making payments - always make the minimum on each debt to avoid paying penalty fees. Then pay as much extra as you can afford on the debt with the highest interest rate, as this will save you the most money.

A great tool for planning your repayments is – it’s a debt calculator that helps you build a payment plan to minimise interest and get debt free as fast as possible.

Consider consolidating your debts

Another strategy for multiple debts is to consider consolidating them by taking out a personal loan or transferring the balances from multiple credit cards onto one, or consolidating them into an existing home mortgage.

This can make your debt more manageable and some credit card providers have zero interest periods for balance transfers for a set period, which can help you pay off your debt faster. Be careful though, as when the interest free period ends these credit cards often attract a higher interest rate.

Avoid the bad debt cycle

Credit cards may be handy, but they often carry very high interest rates (some as high as 18% per year or more), so you should limit how much you use them.

A great way to do this is to change the way you think about credit. Imagine getting 18% interest on your savings. That’s what the bank is making from you and your credit card! If you pay off your debt quickly, you’re effectively saving 18% interest in reverse (or $18 for each $100 you owe). Now that’s a win!

Pay more than the minimum 

It’s really important to pay more than your minimum repayment. The amount you can save in interest can save you thousands of dollars.

Did you know?

The minimum payment for a credit card with an interest free period will not repay the outstanding balance during that term.

For example, if you had $5,000 owing on your credit card with an interest rate of 18% and your minimum monthly repayment starts at $102. By paying off just the minimum each month it would take you 33 years and cost over $17,000 to be free of that debt.

If you paid $200 a month, in just two years and seven months you would have paid off the whole debt for a total cost of $6,200. That’s a saving of almost $11,000!

repayments graph



What to do when you're debt free

As you pay off each debt, close the account if you don’t need it. This removes the temptation to slip back into bad habits. You should also consider reducing the credit limits on any accounts you keep and refuse offers to increase your credit limits in the future.

*Assumes initial balance of $5,000, 18% interest and 2% minimum repayment of outstanding balance. Based on calculations conducted on MoneySmart's credit card calculator (

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