Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
Good Debt vs Bad Debt: What Should You Pay Off Before You Invest?
Ruby Layram
20th Aug 2025
Debt is one of those words that makes people wince. But here’s the truth: not all debt is bad. In fact, some debt can actually help you grow your wealth if you handle it wisely.
If you’re keen to start investing but you’ve also got loans hanging over your head, you might be wondering: should I clear my debts first, or start investing anyway? The answer depends on whether your debt is “good” or “bad.”
In this post, I will break down the difference. Because, yes, some debt can be good!
What Is Good Debt?
Let’s start with good debt- because it often surprises people that debt can be good!
Good debt is the kind that helps you build assets, boost your income, or improve your long-term financial position.
Examples include:
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Mortgages: Owning property can build wealth over time. Mortgage rates are usually lower than potential investment returns, so this is often considered “good” debt.
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Student loans: Borrowing to increase your earning potential can pay off in the long run, even if the loan itself takes years to repay.
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Business loans: If the money goes into growing a profitable business, that’s money working for you.
Good debt isn’t free money, though. It still needs to be managed responsibly. But in general, it doesn’t need to stop you from investing.
You might like: How to invest on a 2k/month salary
What Is Bad Debt?
Bad debt, on the other hand, drains your finances and doesn’t give you anything back.
Examples include:
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Credit card balances: With interest rates often above 20%, these are financial quicksand.
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Overdrafts: Convenient, yes, but expensive if you linger in them.
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Personal loans for non-essential spending: That holiday might have been fun, but you’re still paying for it months (or years) later.
Bad debt eats away at your income and makes it very difficult to get ahead.
If you’re paying 20% in credit card interest, it makes no sense to put money into investments that might only return 5–7% a year.
The Rule of Thumb: Clear Bad Debt Before You Invest
Here’s the simple strategy most money-savvy investors follow:
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Pay off high-interest debt first: If the interest rate on your debt is higher than what you’re likely to earn from investing, clear the debt before you invest.
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Low-interest “good” debt is fine to keep: It can make sense to keep paying your mortgage or student loan slowly while you also build an investment portfolio.
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Use investing as a motivator: Think of it this way: every pound you pay off high-interest debt is a guaranteed return (because you’re saving that interest). Once it’s gone, you’ve freed up cash to invest regularly.
Balancing Debt Repayment and Investing
Of course, life isn’t black and white. You don’t always have to choose one or the other. Here are some ways to balance things.
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Split your strategy: If you’ve got low-to-medium interest debt (say, a car loan at 6%) and you want to start building the investing habit, you could split your spare cash between overpaying the loan and putting a little into investments each month.
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Start small with investing: Even £50 a month into an ISA gets you into the habit and builds confidence, while you still tackle debt repayments.
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Focus on cash flow: Ask yourself: will paying off debt faster give me more monthly breathing room? Sometimes the relief of reducing repayments is more valuable than a small investment return.
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Quick Checklist: Should You Invest or Pay Off Debt First?
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Is your debt over 8–10% interest? → If yes, pay it off before investing.
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Is your debt under 5% interest (like many mortgages)? → You can probably invest while paying it.
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Do you have an emergency fund? (3–6 months’ expenses in cash) → Sort this first before investing or making big overpayments.
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Final thoughts
Despite popular belief, not all debt is bad. In fact, some debt can help you to earn more money in the long run!
If you are ready to start investing, I recommend checking out eToro’s new AI investing companion– it’s like having an expert in your pocket!
Use the AI to find investments that have a higher return rate than the interest in your debt to start slowly building wealth.
Are you interested in learning more about investing? Why not sign up to the MoneyMagpie bi-weekly Investing Newsletter? It’s free and you can unsubscribe at any time if you find it isn’t for you.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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