Debt

Debt covers any amount owed: loans, mortgages, credit card balances, unpaid bills and bonds issued by companies or governments. The person or organisation that owes the money is the debtor, and the one owed is the creditor.

Debt is not automatically good or bad. It can be useful when it pays for something that creates long-term value, such as a home, education or a business that earns more than the cost of borrowing. It becomes harmful when it pays for everyday spending that cannot be repaid, or when the interest is so high that repayments become a burden.

The cost of debt comes mainly from interest. A balance of 5,000 on a credit card charging 22% a year can cost about 1,100 a year in interest if it is not paid down, money that cannot be used for anything else.

Managing debt well means knowing how much you owe, at what interest rate and for how long. People often focus first on repaying the most expensive debts, avoid borrowing more than they can comfortably repay and keep an eye on measures such as the debt-to-income ratio.