Debt isn't inherently evil. A mortgage builds equity. Student loans invest in your future. But unmanaged debt? That's a quiet emergency. This lesson gives you the tools to take control.
By the end, you'll understand the difference between good and bad debt, know exactly how to create a payoff plan, and pick the strategy that works for your brain.
The average American carries $104,215 in debt. You're not alone -- but you can be ahead of the curve by having a plan.
Good debt is an investment that grows in value or generates income. Bad debt is borrowing for things that lose value, especially at high interest rates.
The line isn't always clear -- a car loan for work commuting is more justifiable than one for a luxury upgrade. Context matters.
Builds wealth or future earning power
Costs money on depreciating assets
Categorize each type of debt below.
Interest is the cost of borrowing money. When you only make minimum payments on a credit card, most of your money goes to interest -- not reducing the balance. It's a treadmill.
A $5,000 credit card balance at 24% APR with minimum payments takes 17+ years to pay off and costs over $7,000 in interest alone.
This shows how a $200/month payment on $5,000 at 24% APR splits between principal and interest over time.
The fix: pay more than the minimum. Even $50 extra/month can cut years off your payoff timeline and save thousands in interest.
Two proven methods to crush debt. Same goal, different approaches. Both work -- the best one is the one you'll actually stick with.
Pay off smallest balance first, regardless of interest rate. Quick wins keep you motivated.
Pay off highest interest rate first. Saves the most money mathematically.
Which to choose? If you need motivation wins, go snowball. If you're disciplined and want to save the most, go avalanche. Both are infinitely better than minimum payments.
Enter your debts below and see how long each method takes. The calculator compares Snowball vs Avalanche side-by-side.
Five questions on debt management. Let's see what you've learned!
You now have a real plan to tackle debt. Here's your score:
Good vs bad debt: Not all borrowing is equal. Investments in assets or education can be smart debt.
Interest is the enemy: Minimum payments mostly feed interest. Pay extra to escape the trap.
Snowball method: Smallest balance first for psychological wins and momentum.
Avalanche method: Highest interest first to save the most money overall.
Pick one and start: Both methods beat minimum payments. The best plan is the one you follow.