What is debt?

What is debt? It’s not a silly question. For example, did you know there’s such a thing as ‘good debt’ versus ‘bad debt’? Allow us to explain.

Decoding debt

Put simply, debt is money that’s borrowed by one party from another. It usually comes with some sort of ‘interest’ payment, which is the extra money you pay as the borrower. This interest rate can vary greatly depending on the type of debt you’ve taken on.

Which brings us to ‘good’ versus ‘bad’ debt. Good debt could help you get ahead. Things like student loans or home loans are examples of good debt. They generally have interest rates on the lower side, but even so, remember to only take on what you can actually afford. An example of bad debt is maxing out your credit card on a shopping spree — and worse — not being able to clear the balance before the interest-free payment period ends. Stress central. 

Secured versus unsecured

Secured debt is secured by an asset, like a house, that can be taken if the borrower fails to make payments. A home loan is a secured debt, with the property used to secure the loan.

Unsecured debt isn’t secured by any asset and generally has a higher interest rate. 

How to avoid debt

  • If you haven’t already, create a budget that details your income and expenses. It’s the best way to avoid getting into a situation where you need to borrow money. You might find our budget tool helpful for this.
  • Save for a rainy day - like your laptop dying. Having savings set aside for unexpected costs means you won’t resort to borrowing money elsewhere.
  • Use a debit card online, then you’re only using your own money. Only ever consider a credit card if you are confident in your ability to pay it back, fees and all. There are a range of credit card options, so choose the one that’s right for you.
  • Stop and drop. Ask yourself if what you’re going into debt for is a need or a want. If it’s the latter, ditch it.
  • Beware of buy now pay later schemes. There are loads of these services around, which allow you to get the thing you want, then pay it off over regular instalments. Super-useful on one hand, but super-dangerous on the other if you tend to buy on the fly. For more smart takes on all things debt related, check out our article on managing debt.

Important information

This material is information only and you should seek professional advice about your circumstances.  We’ve taken care to ensure the information is reliable, we don’t warrant its accuracy, completeness, or suitability for your intended use.  To the extent the law allows, we don’t accept any responsibility or liability arising from your use or reliance on this information.

Please talk to us if you need financial advice about our products or services. See our financial advice provider disclosure at anz.co.nz/fapdisclosure