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Managing your money

Good debt vs bad debt: what's the difference?

3 minute read

Is there such a thing as good debt?

Not all debt is created equal. There are different types of debt, some of which are beneficial to your financial position. In this article we take a look at the difference between good and bad debt, what to avoid, what to prioritise when paying off debt, and how we can help you manage your debt with a range of useful tools.

Credit facts

Credit facts

How to pay off your debt

When you only have one debt the solution is simple, pay off as much as you can afford every month. However, if you are paying off multiple debts this may not be enough. We've listed out a few alternative strategies below which could help you pay off your debt quicker.

  1. 01

    Avalanche method

    The avalanche method invoves paying off your debt in order of interest rate. Focus on clearing the balance with the highest interest charges first, whilst making minimum payments on all other debts. Once that one has been cleared, move onto the balance with the next highest interest rate, and so on.

    Every time you pay off one debt, you free up additional money to help clear the next one. 

  2. 02

    Snowball method

    Rather than focusing on the highest interest rate, the snowball method focuses on eliminating the smallest debt first and making your way up to the largest over time. Like the avalanche method, each debt cleared allows you to allocate more money towards the next balance

    However, this method may result in more interest being paid overall when compared to the avalance approach.

  3. 03

    Balance transfers

    For those with credit ratings high enough to make them eligible, a 0% balance transfer card could help reduce repayments required to clear a balance completely.

    There is often a small fee for completing the transfer, but it's usually far less than the interest savings made by doing so.

  4. 04

    Debt consolidation

    If your debt becomes unmanageable, and you are unable to leverage the balance transfer approach, bringing all of your debts together into one consolidation loan could help alleviate some of challenges of paying off multiple debts.

    It's important to be mindful that there may be upfront costs associated with this type of loan, and be sure that the interest rate of the loan is as good as or better than original debt.

     

NatWest blog team

Updated 27th September 2021
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