Sarah borrowed $700,000 at 5.8% to purchase an investment property that generates $650 in weekly rent, with tax-deductible interest. Next door, Marcus owes $18,000 across three credit cards at 20% interest, funding holidays and new furniture. Both have debt. Sarah is building wealth tax effectively, while Marcus is hemorrhaging money to interest charges.
The distinction between good and bad debt is defined primarily by mathematics and opportunity cost.
When borrowing builds wealth
Good debt has a simple litmus test. Does it generate income or appreciate in value faster than the cost of borrowing?
With the RBA cash rate now at 3.85% following February 2026’s increase1, investment property loans typically sit around 5.5-6.5%2. Yet this debt can still be “good” because:
- The interest is tax-deductible: If you borrow to acquire an income-producing asset like a rental property or shares that pay dividends, you can claim the interest as a deduction3. At a 32% marginal tax rate (including Medicare levy), a $40,000 annual interest bill effectively costs you $27,200 after tax.
- The asset (usually) appreciates: While property values fluctuate, Australian capital cities have historically delivered long-term growth that often exceeds borrowing costs.
- Rental income reduces your net cost: A well-selected investment property with strong rental yield can be cash-flow neutral or even positive, meaning tenants are essentially paying down your debt while you build equity.
Business loans used to expand operations or investment loans used to invest in dividend-paying shares, can also qualify as good debt if structured properly, although they carry higher risk and require more sophisticated management.
Here’s the kicker. Good debt requires discipline. The moment you redraw from your investment loan to fund a European holiday, that portion becomes bad debt, the interest is no longer deductible because it’s not being used for income-producing purposes.
The true cost of consumer debt
Bad debt is borrowing funds for consumption rather than wealth creation. The average credit card interest rate in Australia currently sits around 18.5%4, with many rewards cards exceeding 20%.
Recent data shows the average unpaid credit card balance has jumped to $1,780, up 10% in just 12 months5. At 22% interest, paying this off over 24 months means you’d pay $436 in interest on top of the original $1,780 debt. That’s money that could otherwise have been building your emergency fund or contributing to super.
The psychology of consumer debt is insidious. Research shows people spend approximately 15-20% more when using credit cards versus cash, because the payment feels abstract. Then compound interest works against you. That $2,000 designer handbag purchased on a credit card becomes a $2,600 handbag if you only make minimum repayments over three years.
Buy Now, Pay Later services have added yet another layer. While technically interest-free if paid on time, late fees compound rapidly, and the ease of access can lead to over consumption.
Debt reduction strategies that work
If you’re carrying consumer debt, choosing the right payoff strategy can save thousands in interest and years of repayments.
- The Debt Avalanche Method (mathematically optimal). List all debts by interest rate from highest to lowest. Pay the minimum amounts on everything and direct all extra funds to the highest-rate debt first. Once that’s cleared, roll that payment into attacking the next highest rate. This saves the most money in interest charges, costing you less in the long run, but requires discipline.
- The Debt Snowball Method (psychologically powerful). Focus on paying off your smallest debt first, regardless of interest rate. Make minimum payments on all debts but put extra money towards the smallest balance. Once paid, roll the payment into the next smallest debt. Research in behavioural finance suggests that small victories lead to higher completion rates for many people, even if total interest paid is higher.
Which works better?
The one you’ll actually stick with. If you’re motivated by quick wins and need momentum, snowball it. If you’re disciplined and focused on reducing interest, use the avalanche. Some people even combine both, clear one small debt for the psychological win, then switch to the avalanche approach for remaining balances.
Your next move
Take 15 minutes this week to list every debt you carry, including the balance, interest rate, and whether it’s tax-deductible. Then ask yourself: “Is this debt making me money or does it cost me money?”
- For good debt, ensure you’re making the most of any available tax benefits and that the underlying asset is performing.
- For bad debt, choose a payoff strategy today and commit to it.
The difference between financial progress and financial stress often comes down to knowing which debt to embrace and which to eliminate aggressively.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
1 Statement by the Monetary Policy Board: Monetary Policy Decision | Media Releases | RBA
2 Best investment home loan rates in February 2026 | Finder
3 Interest on loans used to purchase income-producing assets like rental properties is tax-deductible. Only the portion of the loan used for investment purposes qualifies for the deduction.
4 https://www.canstar.com.au/credit-cards/national-debt-february-2025/
5 https://www.finder.com.au/news/australian-credit-card-debt-rise