Good debt vs bad debt: which debts to keep and which to clear first

When you apply for the next mortgage, the bank will count your credit card at its *limit* rather than its balance. Even if you’re using the card for points and paying it off every month, a $15,000 limit sits in the servicing calculation as though you owed it all — and tens of thousands of dollars can come off what they’ll lend you for the bigger house. The good-debt, bad-debt chart most articles offer puts the mortgage in one column and the credit card in the other and leaves it there. That sorts the debts by product type, and it tells the couple in Mt Eden with the villa, the car on finance, the everyday card, the Shopify overdraft and a shareholder current account nothing about what each one is doing to the move to a bigger house in the next eighteen months. In this episode, SortMe Resident Money Writer Hugo Jonston runs every household debt through the two questions the chart skips — what did the borrowing buy and will that thing be worth more or less later, and what does it cost to hold if a rate moves or one income pauses — and lands on an honest order of operations for anyone who wants a bigger mortgage inside two years. In this episode: - The limit-not-balance trap — how a $15,000 card limit set years ago quietly sits in the servicing calculation on the day you ask for the mortgage, and the broker practice of cutting it six months before you apply - Mortgage — still the strongest case for borrowing most people will ever have, and why the fix end date decides more than the rate (especially if you plan to sell before it ends) - Business borrowing — the productive overdraft that funds pre-Christmas stock vs the overdrawn shareholder current account the household has effectively taken out of the company and now owes back - Student loan — interest-free while you live in NZ, the cheapest money you’ll ever borrow, but still reduces what the bank will lend because the compulsory repayments come out of your pay - Car loan — why the deal that tips sensible to expensive is the size of the car (the one the household needs vs the one it would like to be seen in), and the Consumer NZ case of a $7,000 car that cost nearly $30,000 over four years at ~30% dealer finance with add-ons rolled in; $20k over five years costs ~$38,800 at 30% vs ~$25,500 at 10% - Credit cards — the US research finding 29% of accounts regularly pay at or near the minimum (anchored by the printed figure), the 40+ years of evidence that people spend more by card than cash, and the $1,600/year you quietly pay on an $8,000 balance at 20% before touching the principal - Buy now, pay later — why we don’t think anyone should use it, the Harvard finding that spending rises once BNPL starts and stays higher, NZ BNPL arrears running at 7.1% in June vs 3.8% for credit cards, and the broker guidance to clear plans and close accounts three months before applying - How households end up in a debt trap — never one big loan they couldn’t afford, but a car, a higher limit, a BNPL couch and a mortgage top-up for the deck, each judged against this month’s income rather than everything already owing, and why a good couple of months is the dangerous time to say yes - How much is too much — inside the RBNZ debt-to-income ceiling, the figure worth knowing is how much of take-home leaves as debt repayments each month and what it looks like if rates rise a point or the side hustle has a flat six months - The order of operations before a bigger mortgage — cut the card limit, clear anything at card or personal-loan rates, address large car finance, leave the student loan alone, and the live question of extra mortgage repayments vs keeping the deposit liquid (inside two years, keep it liquid) - Why an application that understates your spending to get the loan through leaves you making the repayments — read the living-expenses figure before you sign, and the FMA’s active mortgage-fraud investigations - Where SortMe fits — the Clarity stage of the Money Journey putting every account, every loan and the business overdraft into one view, with debts against assets tracked month to month so you can answer the question the chart never asks: is this borrowing lifting what we own, or funding what we spend? Read the full article: sortme.com/post/good-debt-vs-bad-debt-nz