The one thing that keeps many people awake at night is debt. According to Compare the Market's 2024 Household Budget Barometer, one in five Australians feels daily stress about money, while nearly half experience financial strain at least once a week.
When bills are piling up, you may feel overwhelmed by the amount of money you’re spending on debt. However, not all types of debt are bad. If you’re focused on getting out of debt fast, the first step is to understand the difference between good and bad debt so you can prioritise paying down the bad debt first.
What is Good Debt?
Good debt is lower-interest debt which is used to acquire assets that generate income or appreciate in value over time.
1. Home Loan
A home loan, or mortgage, is often considered good debt because real estate generally appreciates over time. Additionally, it can generate rental income, offering further financial benefits.
2. Education
Student loans for higher education are another example of good debt, as they often have lower interest rates and can help you qualify for better-paying jobs, improving your long-term financial outlook. In Australia, government-assisted loans like HECS-HELP and FEE-HELP are designed to make higher education more accessible. While student debt is usually beneficial when the education leads to a career with increased earning potential, some argue that rising tuition costs and underemployment make it a less certain investment.
3. Investments
Borrowing money to invest in stocks, bonds, real estate, or even owning a business can be classified as good debt. Investments, however, don’t come without risks. For example, if you apply for a home loan to purchase an investment property without researching the flood plans, you could lose major value on your property if it floods. It’s also important to do your research and make sure you can afford an investment before taking the risk.
Too much debt of any kind—no matter the potential benefits—can turn into bad debt if it becomes unmanageable. Therefore, it’s crucial to balance the amount and type of debt you take on with your financial goals and risk tolerance.
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What is Bad Debt?
Bad debt is anything that decreases in value the minute after you buy it. It’s when you purchase something that won’t go up in value or generate any income.
1. Credit cards
Credit cards are a common form of bad debt. As of September 2024, the average interest rate on a credit card is 18%, with such high interest rates, credit card debt can quickly spiral, making it challenging to repay. Many Australians struggle with credit card debt because of these high rates. It’s often wise to avoid unnecessary credit card purchases. If you’re facing financial difficulties from credit card debt, options like a balance transfer or debt consolidation loan may help you manage repayments.
2. Car loans
Cars are well-known for their rapid depreciation; they lose value as soon as they’re driven off the lot. While a car loan might be necessary for transportation, if the vehicle isn’t essential for your job or lifestyle, consider alternatives to avoid taking on bad debt. Buying a reliable used car or even opting for more affordable transportation options, like an electric scooter, can help you avoid excessive debt.
3. Clothes, Consumables and Other Goods
Using debt to buy non-essential items like designer clothing, the latest technology, or consumables (e.g., alcohol) is generally considered bad debt. They don’t generate income or increase your net worth. If you want to upgrade to the latest iPhone and buy that new pair of high heels, consult your budget before you stick it on the credit card.
Tips to Managing Debt
If you’re struggling with unmanageable debts, there are options available which can help eliminate the financial pressure involved.
- Consider consolidating high-interest debts into one manageable loan. Debt consolidation can reduce your interest rates, lower fees, and simplify payments, making it easier to stay on track.
- If you don’t have one already, you should create a budget which lists all of your incoming and outgoing expenses. You can download our free budgeting booklet, which can help you get started.
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After budgeting, set aside any surplus funds in a savings account. Regular contributions to this account will create an emergency fund, providing a safety net for unexpected expenses and reducing the need to rely on credit in the future.
Escape Bad Debt Today
If you’re experiencing financial difficulties, Revive Financial can assist. We offer a wide range of solutions to combine your debts into one, easy-to-manage repayment while pausing interest and fees. Get in touch with us today on 1800 534 534 for a free 30-minute consultation.
