Free topic in the app · 100 lessons

Debt explained: interest rates, payoff methods and credit scores

The debt lessons are about the mechanics lenders count on people not knowing: what an APR includes, how minimum payments are set, which debt to clear first, and what moves a credit score.

Four are below. The debt payoff calculator on this site shows the snowball and avalanche orders side by side for your own balances.

Lesson 11m 05s read · level 3

APR vs AER: the headline rate matters

APR includes the fees. AER includes the compounding. Different rates, different worlds.

APRBorrowing cost

AERSavings yield

APR (Annual Percentage Rate) is used on borrowing: it's the headline rate plus all required fees, annualised. AER (Annual Equivalent Rate) is used on savings: it shows what you'd earn including compounding. Both let you compare like-with-like.

Try this Pull up your credit card. Confirm the APR. Now you know its real cost.

Quick check

What's the difference between 'gross rate' and AER on a savings account?

Lesson 21m 10s read · level 2

Snowball vs avalanche: math vs morale

Pay smallest first or highest-rate first? Both work. They serve different humans.

SnowballSmallest first

AvalancheHighest rate

Snowball: pay minimums on everything, throw extra cash at your smallest debt first. Once cleared, roll that payment into the next. Avalanche: same idea, but target the highest interest rate first.

Try this Order your debts two ways: by balance, then by rate. Pick which list you'll actually finish.

Quick check

Why does the snowball method sometimes outperform the avalanche in practice?

Lesson 31m 25s read · level 3

Credit utilisation: the ratio that quietly drives your score

Credit utilisation: 30% of credit score. Below 30% is the rule; below 10% is optimal.

Optimal<10% utilisation

Credit utilisation (percentage of available credit used) is one of the largest credit score factors. Keeping utilisation low improves score; high utilisation damages even if paid in full. Defences: keep balances low relative to limits, pay before statement closing date, request higher limits.

Try this Credit utilisation reported on statement closing date. Pay before closing to report low utilisation.

Quick check

Why might paying your credit card 'in full by the due date' still result in high reported credit utilisation?

Lesson 41m 15s read · level 3

Good debt vs bad debt: the lazy myth

There's no good debt. Only debt that's currently profitable.

The 'good debt' label gets attached to mortgages and student loans. But debt is just a tool. The only honest question is: 'Is this debt's interest rate lower than what the money would earn elsewhere?'

Try this List every debt with its rate. Highest first. That's your priority list.

Quick check

What's the single useful question about any debt?