How to pay down bad debt

It is important to know the difference between “good” and “bad" debt.

Not all debt is created equal and when prioritising which debt to pay off, it can be beneficial to know the difference between “good” and “bad” debt. 

RACQ Bank’s Eszter Cathcart said good debt should allow you to make money or save money, whereas bad debt usually ended up costing money.

“An example of a good debt is borrowing money to purchase a home or an investment property, which may appreciate in value over the longer term,” Ms Cathcart said.

“Student loans, like HELP or HECS, are another example of good debt as they’re an investment in yourself, are interest-free (indexed with inflation) and there’s no timeframe to repay the loan – you only start paying when you earn a certain amount.

“Debt that may be considered as bad or detrimental to your financial wellbeing, is debt that’s been used to buy things that will fall in value, won't earn you any money and will likely cost you money.

“An example of this is using a credit card for new clothes you don’t really need, and then being unable to pay it off by the due date.”

Ms Cathcart said it was important to understand the type of debts you had to help you prioritise paying down debts.

“The debts people usually want to minimise quite quickly are things like credit cards, store cards and unsecured personal loans with a higher interest rate,” she said.

“Often these type of debts feel like a burden and if you’re not paying them off you could be hit with interest.

“If you’re keeping a credit card only for emergencies consider whether it’s time to give it up. 

“Often people who have a credit card for this reason are good savers and will have some money tucked away.

“Consider if it’s costing you money in annual fees and whether you would you be better off using your emergency fund instead?”

Ms Cathcart said once bad debts were paid off you could turn your attention to other debts like HECS and home loans.

“If you can afford to make extra repayments towards your mortgage you can save thousands in interest over the life of a loan, but check the conditions as there may be restrictions on how much extra you can pay,” she said. 

The information in this article has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in the document is general advice and does not take into account any person's particular investment objectives, financial situation or needs.

Before acting on anything based on this advice you should consider its appropriateness to you, having regard to your objectives, financial situations and needs.