Credit & Debt Management
Debt can be a tool to build wealth or a trap that destroys it. Learn the difference between Good Debt and Bad Debt , understand your Credit Score (CIBIL), and discover strategies to become debt-free.
Key Takeaways
- Good Debt (Home Loans, Education Loans) helps build assets.
- Bad Debt (Credit Cards, Personal Loans for luxury) drains wealth with high interest.
- A Credit Score (CIBIL) above 750 is crucial for getting low-interest loans.
- Use the Avalanche Method (pay highest interest first) to clear debt faster.
1. Good Debt vs. Bad Debt
Not all loans are bad. The key is what the borrowed money is used for.
| Type | Examples | Why? |
|---|---|---|
| Good Debt | Home Loan, Education Loan | Builds an asset or increases future income potential. Interest is often tax-deductible. |
| Bad Debt | Credit Card EMI, Personal Loan for Vacation | High interest (12-40%). Value of the purchase depreciates quickly. |
2. Understanding Credit Score (CIBIL)
In India, your creditworthiness is measured by a 3-digit number called the CIBIL Score (300 to 900).
How to Improve Your Score:
- Pay EMIs and Credit Card bills on time .
- Keep Credit Utilization below 30% (e.g., if limit is ₹1L, spend < ₹30k).
- Don't apply for too many loans at once.
3. Strategies to Clear Debt
If you are stuck in bad debt, use one of these proven methods:
Avalanche Method (Best Math)
List debts by Interest Rate . Pay off the one with the highest interest first (like Credit Cards) while paying minimums on others.
Snowball Method (Best Psychology)
List debts by Amount . Pay off the smallest loan first. The quick win motivates you to tackle bigger debts.
Do It Now: 3-Step Debt Detox ✅
- Check Score: Download your free CIBIL report (available once a year).
- List Debts: Write down every loan you owe with its interest rate.
- Stop Bad Debt: Vow not to use your credit card for EMI purchases until previous dues are cleared.