Lesson 1 of 5
Good debt vs bad debt: a framework that actually helps
A mortgage at 4% is not the same as a credit card at 22%. The interest rate relative to investment returns decides everything.
Lesson video
The only question that matters
Is the interest rate on the debt higher or lower than the return you could earn by investing instead?
If your credit card charges 22% and the stock market returns ~10% historically, paying the card first gives you a guaranteed 22% return. No investment matches that.
If your mortgage charges 4% and investments return ~10%, paying the minimum on the mortgage and investing the surplus earns you ~6% net. The mortgage is "good debt" because the spread works in your favour.
This is not moral. Debt is not inherently bad. It is a tool with a cost (the interest rate) and a benefit (what you did with the money). The cost relative to alternative uses is what makes it good or bad.
Debt types ranked by urgency
| Debt type | Typical rate (2026) | Priority | Why |
|---|---|---|---|
| Credit card | 20-29% | Pay off immediately | No investment beats 22%+ guaranteed return |
| Buy now pay later (after 0% period) | 20-40% | Pay off immediately | Often higher than credit cards |
| Personal loan | 8-15% | High priority | Guaranteed return beats most investments |
| Car loan | 5-9% | Medium | Pay off if rate > 6%, otherwise invest |
| Student loan (UK Plan 2) | 7.3% (2026) | Complex (see accordion) | Repayment is income-based, may be written off |
| Student loan (US federal) | 5-7% | Medium | Consider PSLF eligibility before aggressively paying |
| Mortgage | 3.5-5.5% | Low (pay minimum, invest surplus) | Spread to investment returns is positive |
Special cases
The guaranteed return of paying off a 22 percent credit card is 22 percent. No investment in history has reliably matched that. Debt payoff at high rates is the best risk-free return available.
Knowledge check
You have: a £3,000 credit card at 22%, a £15,000 car loan at 6%, and a £200,000 mortgage at 4%. You have £500/month surplus after essentials. Where does it go first?
“Income has three jobs: mandatory expenses, the fun stuff, and the responsible things like save, invest, and pay off debt.”
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Getting started with good debt vs bad debt: a framework
Understand your current position
Use the calculator on the homepage to see your take-home pay and tax position before making changes.
Take the first small step
You do not need to do everything at once. Pick the single action from this lesson that has the highest impact and do it this week.
Review after one month
Check the effect on your payslip or bank statement. Adjust if needed. Progress, not perfection.
Use the Wealthy Employee calculator to see how good debt vs bad debt: a framework that affects your specific take-home pay and tax position.
Knowledge check
Based on what you learned about good debt vs bad debt: a framework , which statement is most accurate?