Not All Debt Is “Bad”

Not every type of debt is something to fear. When used strategically, some types of debt can help you move forward financially. “Good debt” is typically tied to investments in your future. Take student loans, for example, which can be worth it if they lead to a career with a higher earning potential. Mortgages are commonly viewed as good debt because property tends to gain value in the long run, building equity for the homeowner. Business loans also qualify as good debt when they’re used to funding something that has the potential to increase your income or build long-term value. On the flip side, “bad debt” tends to offer no real return and often comes with steep interest rates. This includes things like high-interest credit cards, payday loans, or even car loans with unreasonable terms. These types of debt can quickly spiral out of control if they’re not managed carefully.

As a rule of thumb, try to focus your energy first on eliminating the bad debt. It’s the kind that costs you the most and holds you back from real progress. Here are the basic steps for evaluating, paying down and improving your debt situation over the long term.

1. Know What You Owe: Start by getting crystal clear on your current financial picture. Make a list of every single debt you owe. Write down the total balance, the interest rate, and the minimum monthly payment. It may feel intimidating at first, but having all the facts in front of you is empowering.

2. Choose a Payoff Strategy: Next, choose a strategy for how you’ll attack your debt. One popular method is the snowball approach. With this strategy, you focus on paying off your smallest debt first while continuing to make minimum payments on everything else. Once that first one is gone, you roll that payment into the next smallest debt. The momentum and psychological boost from seeing progress early can help keep you motivated.

Alternatively, there’s the avalanche method, which is a bit more math-savvy. This approach has you tackle the debt with the highest interest rate first. Over time, this saves you more money because you’re eliminating the most expensive debt up front. Both strategies are valid, the key is choosing the one that works best for you and sticking to it.

3. Cut the Extras But Make It Sustainable: One of the most effective ways to free up extra cash for debt repayment is to trim your monthly expenses. That might mean dialing back on takeout, canceling a few unused subscriptions, or postponing big purchases for a few months. But be realistic, it’s important that your budget cuts are sustainable. This isn’t about depriving yourself; it’s about creating just enough breathing room to redirect that money toward your goals.

4. Use Windfalls Wisely: Any unexpected cash, a bonus at work, a tax refund, or a few hundred dollars from a side hustle, can be a golden opportunity. Instead of spending it right away, consider putting it directly toward your debt. Every extra payment chips away at your principal, which reduces the amount of interest you’ll pay overtime and speeds up your timeline to freedom.

5. Consider a Balance Transfer or Refinance: If you have good credit, you might qualify for a 0% balance transfer credit card or a lower-rate consolidation loan. These tools can offer a valuable opportunity to save on interest and pay down your debt faster. Just be careful, these options only work if you avoid adding new debt while you pay off the old and adhering to any timelines for the reduced interest.

In addition to these steps, it also helps to automate your debt payments. Set them up to come out of your account automatically each month, so you never miss a due date. If you can, add a few extra dollars to your minimum payments. Over time, that small effort adds up in a big way. And finally, don’t forget to celebrate your progress. Every time you knock out a debt or hit a milestone, take a moment to recognize it. Whether it’s a dinner out or just a quiet moment to reflect, those small victories are powerful motivators to keep going.

If you are unsure how to tackle your debt, Affinity has a partnership with Navicore¹ to help you navigate credit card debt and our Wellbeing Coaches² are also available to help you navigate building a budget to pay off your debt.

This information is for informational purposes only, is intended to provide general guidance, and does not constitute legal, tax, or financial advice. Each person's circumstances differ and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and legal counsel to discuss your particular needs before making any financial or other commitments regarding the matters related to your condition.

¹ Retrieved from: https://www.affinityfcu.com/financial-wellbeing/credit-counseling

² Retrieved from: https://www.affinityfcu.com/financial-wellbeing/certified-wellbeing-coaches