Liability

Secured vs unsecured

A secured debt is backed by an asset the lender can seize if you stop paying: a mortgage is secured by the home, a car loan by the car, a HELOC by your home equity. Because the lender has that safety net, secured debt carries lower interest rates.

Unsecured debt, like credit cards and most personal loans, is backed only by your promise to pay. The lender takes more risk, so you pay a higher rate. This is why a credit card can cost several times the interest rate of a mortgage.

Amortizing vs revolving

An amortizing debt, like a mortgage or a car loan, has a fixed schedule that grinds the balance to zero. A revolving debt, like a credit card or a HELOC, lets you borrow, repay and borrow again with no built-in end date. Revolving debt demands more discipline precisely because nothing forces it to shrink.

Good debt, bad debt: an honest framing

The popular shortcut says a mortgage is good debt and a credit card is bad debt. There is truth in it, but the framing can mislead. A mortgage helps build net worth because it finances an asset that usually holds value, yet it is still a liability: it costs interest every month and it must be repaid regardless of what the house does.

The honest test has two parts: what interest rate does the debt charge, and what stands behind it? Borrowing at a low rate against an appreciating asset can be sound. Borrowing at a high rate for something already consumed is expensive, whatever you call it.

Rank your debts by rate

When deciding where extra payments go, list every liability with its interest rate and pay minimums on all, then direct every spare dollar at the highest rate first. Paying down a credit card is a guaranteed return equal to its interest rate, which is a better deal than most investments can promise.