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⁽¹⁾. Even if you're using the credit card for points and paying it off every month, the $15,000 limit sits in the servicing calculation as though you owed it all. Tens of thousands of dollars can be taken off what they'll lend you for the bigger house.

Picture a couple in Mt Eden, both earning well, with a villa that has started to feel small now that they have two kids. They have the mortgage, a car on finance, a card for the everyday spend, a small overdraft on the Shopify business, and a shareholder current account with the firm one of them part-owns. Ask them what all of that adds up to each month, or which of it the bank will hold against them when they apply for the bigger house, and neither of them could tell you, because nobody has ever put the five in one place.

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 nothing about what each one is doing to their household or to the move to a bigger house and a bigger mortgage they want to make in the next eighteen months.

Two questions to ask of every debt

The chart skips the two questions worth asking of every debt you hold.

1. What did the borrowing buy, and will that thing be worth more or less later?
2. What does it cost to hold, and can the household carry that cost if a rate moves or one income pauses?

A house, a qualification, or stock that a business sells within six weeks can leave you better off than before you borrowed. A car that is worth thousands less the day it leaves the yard cannot, and the repayments carry on regardless.

The cost of holding a debt can change while the debt itself stays the same. A mortgage you can service comfortably at today's rate becomes a different proposition at a rate two points higher.

Where each household debt sits

Mortgage. A mortgage is still the strongest case for borrowing most people will ever have, since you live in the asset while you pay for it. Where it usually goes wrong is the repricing, when a fix rolls onto a higher rate the household hadn't planned for, so know the month your fix ends and start that conversation before it lands; more on refixing and refinancing here.

If you plan to sell and buy a bigger house, the end date of your current fix matters for the move as well, because selling before the fix ends can mean paying a break fee.

Business borrowing, including the side hustle. An overdraft that funds stock ahead of a Christmas run is productive borrowing when the stock sells, because the debt turns into income. An overdrawn shareholder current account works differently: it is money the household has taken out of the company and now owes back to it, and it is worth clearing on purpose before the accountant finds it at year-end.

The tax treatment of both is complicated and changes often, so the current position comes from IRD or your accountant on the day you act⁽²⁾. Most people only see the business debt once a year when the accounts are done, which is why it belongs in the household picture with everything else.

Student loan. A student loan is interest-free while you live in New Zealand⁽³⁾, which makes it the cheapest money you will ever borrow, and there is little sense in rushing to clear it. It does reduce what a bank will lend you, because the compulsory repayments come out of your pay, so it is not free in every sense. Paying it down ahead of a card balance still costs you money.

Car loan. Whether a car loan makes sense depends mostly on the car. A reliable vehicle that gets two adults to work and the kids to school is buying you access to income.

What tips it from sensible to expensive is the size, because the car a household needs and the car it would like to be seen in are rarely the same vehicle. If you can afford it outright, buy the one you can afford and skip the finance. If you can't, and there is no other way to get to work, the loan is a necessary evil rather than a failure, which argues for a bigger deposit and a shorter term than the dealer will suggest.

Dealer finance is where a car gets expensive. On illustrative rates, borrowing $20,000 over five years at around 30% a year, which is where the high-interest end of dealer finance sits, means repaying close to $39,000, nearly twice what you borrowed. The same loan from a bank costs about $25,500 at 10% a year, or about $27,900 at 14%, which is nearer what the main banks advertise⁽⁴⁾. Consumer NZ found one buyer charged nearly $30,000 over four years for a car with a market value of about $7,000, once insurance and add-ons had been rolled into the loan⁽⁴⁾.

Get a quote from your bank before you go to the car yard, and read every add-on and lock-in clause in the finance contract before you sign it.

Credit cards. A card is useful when the balance clears every month and the points pay for a flight or two a year. Plenty of people mean to clear it and don't: a large US study covering a quarter of that country's credit card market found 29% of accounts regularly paid at or near the minimum, partly because people anchor on the minimum printed on the statement⁽⁵⁾.

Paying by card also changes how much you spend, because tapping a card doesn't feel like your money leaving the way handing over cash does. Researchers have been measuring this for more than forty years, and a 2024 review of 71 papers confirmed that people spend more by card than with cash⁽⁶⁾. The effect is modest on average and strongest on purchases other people see, like the dinner out or the new jacket.

When the balance carries over, card interest is the most expensive money in an ordinary budget by a distance, and carrying $8,000 at around 20% costs roughly $1,600 a year before you've reduced the debt by a dollar⁽⁷⁾.

For a well-paid household that clears the card every month, the risk is the one in the first paragraph: a limit set high years ago because the bank offered it, counted in the servicing calculation on the day you ask for the mortgage.

Buy now, pay later. We don't think anyone should use BNPL. The amounts it covers are small enough to save for over a few weeks and buy outright, and if a pair of jeans needs four payments, the useful question is what else is squeezing the budget this month.

In our view the apps are built to keep you spending, and the research backs that up: a Harvard study of US bank data found that people's spending rises once they start using BNPL and stays higher, mostly on retail⁽⁸⁾. In New Zealand, BNPL arrears have run well above credit card arrears through 2026, at 7.1% against 3.8% in June⁽⁹⁾.

BNPL also counts against you when you apply for a mortgage. NZ mortgage advisers report that banks treat the repayments as an ongoing commitment, which cuts what they will lend, and that some lenders read regular BNPL use as a sign the household isn't managing its money well and decline on it^(10)(11).

The advisers' guidance is to clear the plans and close the accounts at least three months before you apply.

When good borrowing turns

Good debt almost always goes wrong because there is too much of it. Buying an appreciating asset with borrowed money is sound until you have taken on so much that a slow quarter for the business, a rate rise, or a villa that takes four months to sell leaves you unable to hold on, and you end up selling a good asset at a bad moment.

Expensive debt, on the other hand, is survivable when it is small and short. A card balance that lasts two months after a January holiday does little harm, while the same balance carried for three years is usually the reason there is still no buffer.

How households end up in a debt trap

Plenty of households that end up stretched never took on one big loan they couldn't afford. They added smaller ones over a few years: a car on finance, then a higher card limit, then a BNPL plan for the couch, then a mortgage top-up for the deck. Each one looked affordable on its own, because each one was judged against this month's income rather than against everything already owing.

The repayments pile up in the background. If every new commitment takes another few hundred dollars a month, a household can end up with a large share of its pay spoken for before the groceries, without ever having made a decision that felt reckless.

A good couple of months makes this worse. A bonus, a strong run for the side hustle or a stretch without a big bill can make the budget feel looser than it is, and that is when people say yes to the new car or the bigger limit. The repayment lasts for years, and it is still there when the good months end.

Before you add any new debt, I'd ask two questions: what does this take our total monthly repayments to, and could we still meet them in an ordinary month, or a bad one? If the answer depends on the last few good months continuing, wait. I would want the extra money to have been there for at least six months before counting on it.

How much debt is too much

The bank has its own ceiling, because the Reserve Bank's debt-to-income rules limit how much banks can lend at high multiples of income⁽¹⁾. Inside that ceiling, no general number tells you what your household can carry, since that depends on your income, your costs and how secure both are.

The figure worth knowing is how much of your take-home pay 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. If you would still be comfortable, you have room to take on a bigger mortgage. If you would be in trouble within a month, you are carrying more risk than the balance sheet shows, whatever the borrowing originally bought.

Be careful of anyone who makes the numbers fit for you. Most mortgage advisers work hard to get an application right, but the Financial Markets Authority has active investigations into alleged mortgage fraud, and in 2023 a former adviser pleaded guilty to creating false documents to get home loans approved^(12)(13). If an application understates your spending to get the loan through, the bank lends you more than your budget can carry, and you are the one left making the repayments.

Read every figure in the application before you sign it, the living expenses especially, and check they match what your accounts show, because the declaration you sign says the information is true. If you use SortMe, your actual monthly spending is already there to compare against.

The other figure to watch is net worth. Productive debt should show up as assets growing faster than the loans behind them. When the debts climb and nothing on the other side moves, the borrowing is paying for a lifestyle and describing itself as an investment.

What to clear first before you apply for a bigger mortgage

Start with the card, and start with the limit. Ring the bank and cut a $15,000 limit down to what a month's spending needs, and do it about six months before the mortgage application so the change has settled by the time a lender looks⁽¹⁾.

Then clear anything at card or personal-loan rates. If there are several, pick the payoff method you'll finish rather than the one that wins on a spreadsheet.

The car finance comes next if the loan is large relative to the car's value, since the bank counts the repayment in full. Leave the student loan alone, because overpaying an interest-free loan while a card balance sits there costs you money.

After that comes the question with no general answer: extra repayments on the current mortgage, or keeping the money liquid for the deposit on the next house. It turns on your rate, what breaking the fix would cost, the timing of the move, and how comfortable you are waiting.

With a move inside two years, I would keep the money liquid. If the move is further off or might not happen, extra repayments are the better default, since they cut your interest from the day they land. Either way, this is the decision where twenty minutes with a mortgage adviser earns their fee, because they can put your rate, your break fee and what the next lender will offer side by side.

Seeing the whole position in one place

Every judgement above depends on having the full position in front of you. Most households never get there, because the mortgage, the card, the car finance, the business overdraft and the shareholder account live in five different places, and two of them don't think of themselves as lenders at all.

SortMe connects those accounts and shows the debts against the assets, including the business, so you can answer the question the chart never asks: is this borrowing lifting what we own, or funding what we spend? Tracked month to month, it also shows whether the distance between what you own and what you owe is closing.

Getting every debt into one view is the first stage of SortMe's Money Journey, Clarity, and the couple in Mt Eden would have it in their first week, including the card limit the bank is going to count. That is a few months before the bank would have told them.

Before you change anything

This article is general information and isn't personalised financial advice, and SortMe isn't a financial adviser. Lender servicing rules and the tax treatment of business borrowing both change, so confirm anything current with your bank, IRD or your accountant before acting on it.

If debt is causing real stress at the moment, MoneyTalks is free and confidential⁽¹⁴⁾. If you'd like advice specific to your situation, SortMe can put you in touch with a licensed adviser.

If you'd like to see every account and every loan in one place, and whether the distance between what you own and what you owe is closing, you can try SortMe for $1 for 7 days at sortme.com.

Sources

1. Credit card limits counted in NZ mortgage servicing, and the RBNZ debt-to-income rules: The real cost of credit cards on your mortgage capacity, Mortgage Lab — mortgagelab.co.nz; Global Finance — globalfinance.co.nz; Debt-to-income explainer, Reserve Bank of New Zealand — rbnz.govt.nz. The six-month lead time is broker practice rather than a rule.
2. Tax treatment of business borrowing and shareholder current accounts is deliberately not stated here. Confirm with IRD and your accountant.
3. Student loan interest and fees, Inland Revenue — ird.govt.nz: student loans are interest-free for NZ-based borrowers.
4. Customer charged nearly $30k for a $7k car, Consumer NZ, 9 May 2023 — consumer.org.nz: a 2007 Toyota Blade listed at $13,000 against a Trade Me valuation of about $7,000, interest at 29.96%, $4,973 of add-ons and fees, nearly $30,000 repaid over four years. The $20,000 five-year totals are arithmetic on illustrative rates: about $38,800 at 30%, about $25,500 at 10% and about $27,900 at 14%. Advertised NZ bank car finance ranged from roughly 10% to 16% when checked in October 2026, so the rate you are offered depends on the lender and your circumstances.
5. Keys and Wang (2019), Minimum payments and debt paydown in consumer credit cards, Journal of Financial Economics; NBER working paper w22742 — nber.org: 29% of accounts regularly pay at or near the minimum.
6. Schomburgk, Belli and Hoffmann (2024), Less cash, more splash? A meta-analysis on the cashless effect, Journal of Retailing 100(3) — doi.org: 392 effect sizes from 71 papers; a small but significant effect, stronger for conspicuous consumption.
7. Card interest example: $8,000 at around 20% is roughly $1,600 a year. The arithmetic is exact; the rate is illustrative.
8. Di Maggio, Katz and Williams (2022), Buy Now, Pay Later Credit: User Characteristics and Effects on Spending Patterns, NBER working paper w30508 — nber.org.
9. Credit Indicator Report, July 2026 (June 2026 data), Centrix — centrix.co.nz: "Buy Now Pay Later arrears also declined, falling to 7.1%"; "Credit card arrears improved to 3.8% in June". Checked against the latest available report on 8 October 2026.
10. How Afterpay affects your mortgage application, Opes Partners, 15 May 2023 — opespartners.co.nz: banks treat BNPL repayments as ongoing liabilities, and the advice is to pay off and stop using BNPL for three months before applying.
11. Can Afterpay torpedo first-home buyers' chances of getting a mortgage?, OneRoof, 11 September 2021 — oneroof.co.nz: a Loan Market adviser reports a bank calling a client's Afterpay use evidence they were not managing their money well, and clients declined on BNPL activity.
12. FMA puts mortgage fraud and commission conflicts on notice for 2026/27, NZ Adviser, reporting the FMA's Financial Conduct Report 2026/27 (30 June 2026) — mpamag.com: the FMA has active investigations into alleged mortgage fraud.
13. Former financial adviser pleads guilty to dishonesty offences, Financial Markets Authority, 1 November 2023 — fma.govt.nz: a mortgage adviser created false pay slips, employment contracts and verification forms across seven home loan applications between 2018 and 2020.
14. MoneyTalks, the free and confidential financial-capability helpline (NZ).