Good Debt, Bad Debt, and How to Pay It Off

Debt has a way of making people feel like they've done something wrong. But the reality is that most of us will borrow money at some point in our lives, whether that's a student loan, a car payment, a credit card, or a mortgage.

It's one of the most common parts of adult financial life, and yet it's also one of the things people feel most ashamed to talk about.

I know that feeling firsthand. When I was 17, I applied for a student loan and was turned down.

Instead, I ended up with a student line of credit through the bank, which sounds similar but comes with one big difference: the interest rate.

At one point I had around $50,000 Canadian of debt, and because it was a line of credit rather than a government loan, I was paying a much higher rate than most of my peers.

Paying it off took real effort over 5 years, and there were moments it felt like it would never end. But it did. What I didn't have was a roadmap - I was just moving forward and hoping for the best.

Understanding how debt works, and what makes some of it so much more expensive than other kinds, would have changed a lot for me. Here's what I wish someone had told me.

Not All Debt Is Created Equal

Debt is simply money you borrow and agree to pay back over time, usually with interest.

Interest is the fee you pay for using someone else's money. The higher the interest rate, the more expensive that borrowing.

Debt isn't automatically bad. In fact, some debt can be genuinely useful.

Good debt creates value for Future You, while bad debt tends to cost you without giving much back.

A mortgage is the classic example. It gives you a roof over your head and, over time, a financial asset that's likely to grow in value.

Certain education loans can work the same way, borrowing now to increase your earning power later.

Bad debt, on the other hand, tends to come with high interest rates and no long-term upside.

Credit card debt used to cover everyday spending you couldn't otherwise afford is the most common example - the interest compounds quickly, and you're not building anything that benefits you down the line.

The distinction isn't about judging yourself for how you got here. It's about understanding the cost of what you owe and deciding what to do with that information.

When Debt and Investing Collide

Here's a question that comes up a lot: should I be investing if I still have debt?

The answer depends on what kind of debt you have. If any of your debts carry an interest rate higher than roughly 7 to 10%, consider paying those down before investing heavily or adding large amounts to your FU Fund (more on that linked in Resources below).

That’s because if your debt is costing you 15% a year in interest, but your investments are likely to return around 7% over the long term, the math doesn't work in your favour - the interest you're paying will outpace what you're earning.

There's also an emotional dimension to this.

Carrying expensive debt while investing can create a background hum of anxiety that makes it harder to stay the course. If markets dip and you're already feeling financially stretched, you're more likely to make reactive decisions, like selling at the wrong moment, that set you back further.

That doesn't mean you should stop all investing entirely - if your employer matches pension contributions, for example, that's usually still worth keeping up with. But as a general principle, expensive debt tends to deserve your attention before your investment portfolio does.

First, Know What You Owe

Before you can make a plan, you need a clear picture.

Sit down and list every debt you have. For each one, write down the type of debt, the current balance, the interest rate (usually shown as APR), and the minimum monthly payment.

This step feels uncomfortable for most people, and it's tempting to keep things vague or procrastinate, but the reality is that’s an expensive move.

The moment you can see everything clearly in one place, the debt stops being a shapeless source of dread and starts being something you can actually make a plan around.

Two Ways to Pay It Down

There's no single right way to pay off debt, but there are two methods that come up again and again, and both are worth knowing about.

The Snowball Method

Start Small, Build Momentum

The snowball method is about paying off your smallest debt first, regardless of its interest rate.

Here's how it works:

You keep paying the minimum on all your debts. Then you take any extra money you have and put it towards your smallest balance first, regardless of interest rates.

When that debt is gone, you roll what you were paying on it into the next smallest debt. Each payment gets bigger as you go, like a snowball rolling downhill.

Say you have three debts: €300, €800, and €2,000. You focus on the €300 first. Once it's cleared, the money you were putting towards it goes onto the €800. Then both of those payments go onto the €2,000.

The big advantage here is psychological.

Clearing a debt completely, even a small one, feels good. That feeling of progress can be a powerful motivator, especially if you've struggled to stay consistent with money goals in the past.

The downside is that you're not thinking about interest rates - if one of your larger debts is very expensive, you could end up paying more overall by leaving it for later.

The Avalanche Method

Target the Most Expensive Debt First

The avalanche method takes the opposite approach.

Again, you pay the minimum on everything, but any extra cash goes towards the debt costing you the most in interest. Once that's cleared, you move to the next highest rate, and so on.

Mathematically, this is usually the cheaper option. You're cutting off the most expensive interest first, which means less money wasted over time.

The downside is that it can feel slower. If your highest-interest debt also happens to be your biggest one, it might take a long time before you see a balance fully disappear. That can make it harder to stay motivated.

The Best Method Is the One You'll Actually Stick To

Here's the honest truth: both methods work. The one that's right for you depends on what kind of person you are.

If you know you need quick wins to stay motivated, and you've struggled with consistency before, the snowball might be your best bet.

If you're comfortable playing a longer game and want to minimise what you pay overall, the avalanche could save you more money.

The perfect strategy on paper means nothing if you don't follow through. Pick the method that fits how your brain works, and commit to it.

A Few Practical Things That Help

If you're carrying high-interest debt, it's worth calling your lender and asking whether there are options to lower your rate, restructure your payments, or transfer the balance somewhere cheaper. Lenders don't always volunteer this information, but many have options available if you ask.

I did this myself years ago with a Canadian credit card I had with BMO, and negotiated to reduce the balance by 40% in one phone call by agreeing to a future payment schedule of the remaining balance. That won’t be possible in every situation, but you have nothing to lose by asking.

Once you've picked your approach for paying off the debt, automate your minimum payments wherever possible. Missing a payment because you forgot is an easy problem to avoid, and late fees and penalties make an already expensive situation worse.

And while you're paying down debt, try to avoid adding new high-interest debt to the pile.

If your debt ever feels genuinely unmanageable, reaching out to a non-profit debt advice service or a financial counsellor is a smart and proactive move, not a sign of failure.

It's worth knowing that people have come back from serious debt, including bankruptcies, and gone on to build genuinely secure financial lives. Where you are right now is not where you have to stay.

People have come back from serious debt, including bankruptcies, and gone on to build genuinely secure financial lives - where you are isn't where you have to stay.

Debt and Future You

Good debt, used intentionally, can help you build the life you want. Bad debt, left unaddressed, quietly chips away at your progress.

When I was tackling my debt, I didn't know about these strategies. I kept my living costs manageable, landed a corporate job, worked my way up, and directed enough as much of my salary as I could at the debt each month until it was gone.

It worked, but I was figuring it out as I went, and deeply worried. Knowing what I know now, I think I could have felt a lot calmer about the whole thing.

Wherever you're starting from, a plan changes everything. Future You is already grateful.