Good Debt vs Bad Debt: Every Debt Ranked by What It Costs Today, Which to Pay Off First, and the 0% Traps (Money School, Lesson 9)

There is no such thing as good debt and bad debt; there is cheap debt and expensive debt, and the only number that tells them apart is the interest rate. In August 2026, credit cards charged 22.36% on balances that carried interest, a two-year personal loan from a bank averaged 11.90%, a new-car loan about 6.35% to 7.5%, a new federal undergraduate student loan 6.52% fixed, and a 30-year mortgage about 7.25%. To decide which to pay off first, list every debt, pay every minimum automatically, and send every extra dollar to the highest rate first. Here is the part that surprises people: the debt with the friendliest name is often the most expensive one you have. A "0% interest" store card can charge every month of deferred interest back at once if a single dollar is left at the end of the promotion, and a buy-now-pay-later plan is free only until the first late fee. This is Lesson 9 of Money School.

Jake owed money in seven places, and until the evening Ethan made him write them all on one page, he could not have told you the total. The van loan. The store card from the shop's new counter. A personal loan from two winters ago. A buy-now-pay-later plan for a laptop, and a second one for the shop's new phone system. His student loan, which he had half forgotten because it came out automatically. And the card from Lesson 3, which he had already started paying down. When Ethan added up the interest he was paying across all seven every month, Jake went quiet for a while, then asked the right question: "Which one do I kill first?"

If your debts feel like a pile you cannot see the bottom of, you are in the most crowded room in the country. American households owed $18.77 trillion in the second quarter of 2026, and more than $1.26 trillion of it was on credit cards. You are not uniquely bad with money; you live in an economy built to lend to you, at every checkout and every dealership. Nobody taught me how to rank debts either. For years I made extra payments on my student loan, because it was the biggest and felt the most serious, while a card at more than three times the rate sat untouched. I was paying down the cheapest money I had first. This lesson exists so that you don't.

Good debt vs bad debt: rank them by what they actually cost

You will hear that a mortgage is "good debt" and a credit card is "bad debt." The idea underneath is sound, and the labels mislead. A mortgage at 7% on a house you cannot afford is bad debt. A card balance at 0% that you clear before the promotion ends is, for those months, the cheapest money you will ever borrow. What actually separates them is two questions, and only two:

1. What does it cost? The annual percentage rate, or APR, plus any fees. This is the number that decides the order you pay things off.
2. Does what you bought pay you back? A loan that buys an education that raises your income, a home you would otherwise rent, or a work van that earns money, is paying some of its own interest. A loan that bought a holiday or a sofa is not.

Here is every common kind of household debt, ranked by what it typically costs today, with the rates measured in August 2026 unless noted. Your own rates are on your statements; find them, and put them in this order.

Two things jump out. First, the "bad debt" at the top costs three to four times what the "good debt" at the bottom costs; a dollar paid toward a card saves you far more than a dollar paid toward a mortgage. Second, a mortgage you took out a few years ago at a low fixed rate may be the cheapest money you will ever have. If your mortgage is at 3%, paying it down early earns you 3%; the high-yield account in Lesson 6 may pay more than that with your money still in reach.

Which debt to pay off first: the order, in five steps

The order that saves the most money is simple, and it is the same one a company's finance team would use on its own borrowing: keep everything current, then attack the most expensive money first. In practice:

1. Automate every minimum payment. A missed payment costs a late fee, a penalty rate and, after 30 days, a mark on your credit file. No ranking matters until every debt is safe.
2. Write the list. Every debt, its balance, its APR, its minimum payment and its due date, on one page. Most people have never seen this page for their own life, and seeing it is half the work.
3. Sort by APR, highest first. That is your attack order. Payday and title loans first if you have them, then cards, then personal loans, and so on down the table above.
4. Send every extra dollar to the top of the list. When it is gone, roll its whole payment, the minimum plus the extra, into the next one. Each payoff makes the next one faster. This is the debt avalanche from Lesson 3, applied to everything you owe.
5. One exception, for momentum. If a debt is small enough to clear this month, clear it first even if its rate is lower. One less bill, one less due date, and the proof that the list gets shorter are worth a few dollars of interest. Lesson 3 calls this the snowball; use it as a starter, then go back to the avalanche.

Here is Jake's page, sorted the way the steps say. The balances are his; the rates are the ones on his statements.

The pay-in-four plans sit at the bottom only because they cost nothing while they are paid on time; their job on the list is to be on autopay so that they never move up it. Everything extra goes to line 1.

Where does the extra money come from? From the places the earlier lessons already found it: the subscriptions and re-shopped bills in Lesson 5, the next raise split in Lesson 4, the canceled policies in Lesson 8. Even $100 a month aimed at the right debt changes the timeline.

Jake: "So the student loan I've been overpaying is actually the last one on the list."

Ethan: "Second to last, after your old mortgage-free life. The store card at the top is costing you more per dollar than all the others. Point the extra there and leave the student loan on autopay."

Pay off debt or save? The sequence that answers it

This is the question I get asked most, and it has a real answer, in order. You do not have to pick one forever; you do them in sequence, and some at the same time.

1. A starter fund, about one month of essentials. Without it, the next car repair goes on a card and undoes your payoff. This is the first part of Lesson 2.
2. Any employer retirement match. If your employer matches your contributions, contribute enough to get the whole match even while you pay debt. A 50% or 100% match is an instant return no debt payoff can beat. Lesson 13 covers it in full.
3. Debt above about 8% to 10%. Cards, store cards, payday loans, most personal loans and many used-car loans. Paying these off is a guaranteed return equal to their rate, which no savings account and no reasonable investment can promise.
4. The rest of the emergency fund, up to the full target from Lesson 2.
5. Cheap debt and investing, side by side. For debt below the rate a high-yield account or a long-term investment can reasonably earn, mortgages and federal student loans at low fixed rates, keep paying on schedule and build the reservoir in Stage 3 alongside it.

The boundary in step 3 is a judgment, not a law. A debt at 7% sits right on it: paying it off is a sure 7%, investing might earn more over decades with risk. If the debt keeps you awake, pay it off; peace of mind is a legitimate return, and nobody who paid off a 7% loan early ever regretted it.

The traps: deferred interest, buy-now-pay-later and the longer loan

Three kinds of debt are designed to feel cheaper than they are. None of them is illegal, and each has caught smart people I know.

Deferred interest, the "0% if paid in full" deal. Many store cards and medical financing plans offer "no interest for 12 months." Read the words after it. With a true 0% introductory rate, interest starts only on what is left when the promotion ends. With deferred interest, the interest has been quietly accumulating at the full rate since the first day, and if any balance remains at the deadline, even a few dollars, all of it is charged at once. The rule: divide the purchase by the number of promotional months, pay at least that much every month, and set a reminder a month before the end.

Buy-now-pay-later stacking. A pay-in-four plan on one purchase, paid on time, can genuinely cost nothing. The trouble is that each plan is small enough to feel harmless, and several of them run at once with different due dates, all drawing from the same checking account. Late fees are where these plans make money: in 2021, more than one user in ten was charged at least one, up from fewer than one in twelve a year earlier. If you use them, use one at a time, on autopay, for things you would have bought anyway.

The longer loan with the lower payment. A dealer who cannot lower the price can always lower the payment by stretching the loan from 60 months to 72 or 84. The payment drops; the total interest rises, and you spend more of the loan owing more than the car is worth, which is when people buy the GAP cover from Lesson 8. Negotiate the price and the rate; let the term be the shortest you can afford.

Jake: "The laptop plan and the phone system plan come out on different days. I didn't even think of them as debt."

Ethan: "That's the design. They're debt with good manners. Put them on the list with the others and let the list decide."

Mortgages and student loans: the cheap debt to leave alone, mostly

The two biggest debts most people carry are usually the cheapest, and they come with features the expensive ones do not have. That is why they sit at the bottom of the attack order.

Mortgages. A fixed-rate mortgage has a rate that will never rise, a payment that inflation shrinks every year, and a house at the other end. If yours is at a low fixed rate from a few years ago, it is very likely the cheapest money you will ever borrow, and paying it down early is a low-return use of your extra dollars while anything above it on the list remains. Once everything above it is gone and the reservoir is growing, extra mortgage payments are a fine, safe choice, especially as retirement nears. Before you do, check that your lender applies extra payments to the principal and that your loan has no prepayment penalty.

Federal student loans. New undergraduate federal loans carry a 6.52% fixed rate for the 2026-27 school year, graduate loans 8.07%, and PLUS loans 9.07%. Federal loans also carry protections that private loans do not: income-driven repayment options that tie the payment to what you earn, deferment and forbearance in hard times, and, for some careers, forgiveness programs. Those rules have changed several times recently, so check the current options for your loans on the official federal student aid site, not a company that contacts you about them. The one rule that does not change: refinancing a federal loan into a private one gives those protections up for good, and it is worth doing only if you are sure you will never need them.

Private student loans have none of those protections and are ranked purely by their rate, like any other loan on your list.

Debt consolidation and balance transfers: when they help

Consolidation means replacing several debts with one, ideally at a lower rate. It helps in exactly one situation: when the new rate is genuinely lower and you do not run the old balances back up. A personal loan at 11.90% that pays off cards at 22% saves real money. A 0% balance transfer for 15 or 18 months, with a fee usually a few percent of the amount moved, can save even more if you pay it off inside the promotion. Lesson 3 walks through the two cases where a balance transfer is worth it.

It hurts in three situations. When the new rate is not actually lower once fees are counted. When the longer term means more total interest even at a lower rate. And, most often, when the cards that were paid off are used again, so you end up with the new loan and new balances on top of it. Consolidation reorganizes debt; it does not reduce it. Before signing anything, write the total you would pay under the new loan next to the total under your current plan, and choose the smaller number.

Be wary of any company that calls itself "debt relief" or "debt settlement" and charges a fee to negotiate with your lenders. Settled debts usually show on your credit file as settled for less than owed, fees can be large, and nothing it does is beyond what you or a nonprofit credit counselor can do. If you are truly underwater, a nonprofit credit counseling agency can review your situation and, where it fits, set up a debt management plan with your card issuers, usually at low or no cost.

The United Kingdom and Australia: same ranking, different names

The ranking works everywhere, because it only needs the rate on each debt. In the United Kingdom, credit cards and overdrafts are usually the expensive end, and student loans in England work less like debt than like a graduate tax: on the plan for students who started from August 2023, repayments are 9% of income above 25,000 pounds a year, taken through payroll, the interest rate is capped at inflation, and any balance is written off 40 years after repayments begin. That makes overpaying them a poor use of extra money for most graduates, which is the opposite of the American instinct. Mortgages are commonly on fixed deals for two or five years, after which the rate can jump; the date your fix ends belongs on your list.

In Australia, the same ranking applies to cards, personal loans and car loans. The government student loan, HELP, is indexed to inflation each June rather than charged interest (2.8% in 2026), and is repaid through the tax system once income passes a threshold, so it usually sits at the bottom of the list. Many home loans have an offset account, where savings held in it reduce the interest on the mortgage while staying in reach, which changes the save-or-pay question for anyone who has one.

Wherever your paycheck lands: find the rate, sort by it, pay the top, and do not let a friendly name or a low monthly payment do your sorting for you.

The payoff calculator: what an extra payment is worth on one debt

Put in a balance, its APR and what you pay each month, then the extra you could add. The calculator shows how long it takes and how much interest you pay with and without the extra. Try your most expensive debt first.

With the default numbers, a $4,000 card balance at 22.36% and $120 a month, the extra $100 a month cuts the time to clear it by more than half. That is what "highest rate first" means in practice: the same dollar does far more work at the top of the list.

This week's exercise: the one-page debt list, do this with me

Twenty minutes, one page, and the statements you already pulled in Lesson 5. I keep mine in the same dated note from Lesson 1 and update it every quarter.

1. Write every debt you have: cards, store cards, buy-now-pay-later plans, car loans, personal loans, student loans, the mortgage, anything owed to family.
2. Next to each, write four things: balance, APR, minimum payment, due date. If you cannot find the APR, call or log in until you do; it is the one number that matters.
3. Turn on autopay for the minimum on every one that is not already automatic.
4. Sort the list by APR, highest first, and circle the top line. That is where every extra dollar goes from today.
5. Write the extra you can send this month, even if it is $25. Put it on the circled debt.
6. Put a reminder in your calendar for three months from today to update the page. Watching the total fall is the reward; give yourself the chance to see it.

If the total on that page frightens you, that is a normal and honest reaction, and it is the last time the number will be a surprise. From here, it only gets smaller.

Honest aside: debt is not a moral failure

Debt carries a weight of shame that no other financial tool does, and the shame is unearned. Lenders spend enormous sums making borrowing easy at exactly the moments you are most likely to say yes: at the till, on the dealer's lot, in the checkout of every app. Most people's debt is the residue of ordinary life, a car that broke, a job that ended, a child that arrived, a year when the paycheck did not stretch, not of recklessness. The aim of this lesson is not to make you feel worse about what is on the page; it is to make the page work for you.

And debt is not always the enemy. Borrowing at a fair rate to buy a home you will live in, a qualification that will raise your income, or a tool that earns money is one of the oldest and most useful things money can do. The skill is not avoiding debt; it is knowing the price of each kind and paying the expensive kind off first.

Where this fits in Money School, and what comes next

Lesson 9 is the fifth lesson of Stage 2, "Build the floor." With a fund in a high-yield account, a credit score that keeps borrowing cheap, the four policies that matter, and a ranked debt list, your floor is nearly complete. Lesson 10, the last lesson of the stage, is about scams: the six shapes every financial con takes, because the fastest way to lose a floor you have built is to hand it to someone pretending to be your bank.

Stage 3 then turns from defense to growth: compound interest, index funds, retirement accounts and how much is enough. The course page shows every lesson and which ones are live.

Debt: your questions, answered straight

Jake's list had seven lines and a total he did not want to read out loud. The store card was at the top at 27.99%, so the extra went there: the $47 a month from canceled policies, the $151 from his cost review and $100 from the shop's best month. It was gone in five months, and its payment rolled into the personal loan. He put both buy-now-pay-later plans on autopay and promised himself no third. The student loan, at 4.5% from years ago, stayed on autopay and stopped getting his extra money. A year later the list had four lines and a total he could say without flinching. Ethan wrote the line below at the top of the page.

Revision note. Written October 24, 2026, as Lesson 9 of Money School. The figures carry their dates in the text: the New York Fed's household debt report for the second quarter of 2026, the Federal Reserve's consumer credit rates for August 2026, second-quarter 2026 auto loan averages, federal Direct Loan rates for 2026-27, and mortgage lock rates for October 22, 2026. "Don't count your chickens before they hatch," says the old proverb; count your debts instead, every one of them, on one page.