Good debt, bad debt
Debt is a tool. Used for things that grow in value or raise your income, it can help. Used for things that lose value, it quietly drains you.
Productive and costly debt
A reasonable home loan or an education loan that raises your earning power can be productive debt: lower rates, a lasting asset, sometimes tax benefits. Credit card balances, personal loans for holidays and gadgets on EMI are costly debt: high rates for things that lose value.
Credit card interest often runs at 36 to 45% a year. No investment reliably earns that. Clearing it is the best “return” available to most people.
Avalanche: highest rate first
- 1Credit card, 42%
- 2Consumer loan, 16%
- 3Personal loan, 14%
Snowball: smallest balance first
- 1Consumer loan, ₹50,000
- 2Credit card, ₹80,000
- 3Personal loan, ₹1.2 lakh
Paying debt down: avalanche or snowball
The avalanche method pays minimums on everything and throws extra money at the highest-interest debt first. It saves the most interest. The snowball method clears the smallest balance first for a quick win, then rolls that payment into the next. It can be easier to stick with.
How much is too much
Keep total EMIs under about 40% of take-home pay, and ideally under 30%. Watch for “no-cost EMI” offers: the interest is often hidden in a higher price or processing fee.
Key takeaways
- 1Borrow for appreciating assets or earning power, not consumption.
- 2Clear credit card debt before investing.
- 3Keep EMIs under about 40% of take-home pay.
Try it with your own numbers
Finish this lesson
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Educational content, not investment advice. Figures are illustrative.