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.
The number of UK adults with ‘low financial resilience’ jumped from 10.7 million to 14.2 million from March to October 2020. Low financial resilience manifests as being over-indebted, having low or erratic income, or low savings.
At the end of June 2021, UK consumers owed over £1,742 billion, up £67.3 billion on the previous year. On average, unsecured debt per UK adult is over £3.5k.
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.
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.
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.
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.
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.
App available to customers aged 11+ with a compatible iOS and Android device and a UK or international mobile number in specific countries. Credit score available once opted in through the app, to customers aged 18+, with a UK address and is provided by TransUnion. You must be aged 16+ to view Spending. Only available for Personal and Premier accounts.