Bad debt is the financial pitfall that can quietly undermine your plans, goals, and peace of mind. In a year where inflation pressures and cost-of-living increases remain front-page news, Australians are feeling the pinch—and the temptation to borrow for quick fixes is everywhere. Yet not all debt is created equal. Let’s unravel what makes debt ‘bad’, why it matters in 2025, and what steps you can take to avoid letting it take over your financial future.
What Counts as Bad Debt?
Not every loan or credit facility is the enemy. Debt can be a useful tool for building wealth or managing cash flow. But bad debt is different: it typically refers to money borrowed for depreciating assets or everyday expenses, with little to no prospect of generating future value. Here’s what to watch for:
- Credit card balances that roll over month to month, accruing high interest (averaging over 19% p.a. on many Australian cards in 2025).
- Buy Now, Pay Later (BNPL) purchases that lead to spending beyond your means, with late fees stacking up.
- Personal loans for holidays, luxury items, or everyday expenses rather than investments or emergencies.
- Payday loans with eye-watering effective interest rates, often targeting financially vulnerable Aussies.
By contrast, ‘good debt’—like a mortgage on a well-chosen property, or a student loan for a high-ROI qualification—can help you get ahead. The danger comes when repayments become unmanageable, or when interest charges outstrip any value the debt might have delivered.
The 2025 Landscape: Why Bad Debt Is a Growing Problem
This year, several factors have made bad debt more perilous for households across Australia:
- Persistent cost-of-living pressures: The latest ABS data shows food, energy, and rent costs continue to rise, making it harder to balance household budgets without resorting to credit.
- Interest rate environment: Although the RBA paused rate hikes in early 2025, rates remain elevated compared to pre-2022, which means higher repayments on variable-rate loans and credit cards.
- BNPL regulation: The Australian government’s 2025 BNPL regulatory reforms require providers to conduct credit checks and enforce responsible lending, but many users remain unaware of the compounding costs of missed payments.
- Rising household debt: Australia’s household debt-to-income ratio remains among the world’s highest, putting extra pressure on families with little financial buffer.
These pressures can push even cautious spenders toward debt traps. For example, according to ASIC’s recent data, more than 40% of BNPL users missed at least one payment in the past year, triggering late fees and credit score hits.
How to Spot and Escape Bad Debt
The good news: bad debt isn’t a life sentence. Here’s how to identify if you’re at risk, and practical steps to get back in control:
- Know your numbers: List every debt you owe, including the balance, interest rate, and minimum monthly repayment. Warning signs: you’re only making minimum payments, or borrowing more to pay off existing debt.
- Prioritise repayments: Focus on clearing high-interest debts first—often credit cards and payday loans. Consider the ‘avalanche’ (highest rate first) or ‘snowball’ (smallest debt first) methods for repayment motivation.
- Consolidate where possible: If your credit history allows, a debt consolidation loan or balance transfer offer (some still available at 0% for 12–24 months in 2025) can reduce interest costs and simplify repayments.
- Seek hardship options early: Lenders in Australia must offer hardship variations under the National Credit Code. Don’t wait until payments are overdue to ask for help.
- Reframe your spending: Use budgeting tools (like the government’s MoneySmart app) to track expenses and set firm limits on discretionary spending.
Real-life example: Sydney resident Marcus, 29, racked up $8,000 in credit card and BNPL debt during 2023–24. By consolidating into a lower-rate personal loan and cutting non-essential subscriptions, he slashed his monthly repayments by $220 and aims to be debt-free by early 2026.
Preventing Bad Debt: Habits That Last
It’s one thing to escape bad debt—another to ensure it doesn’t creep back in. In 2025, consider these strategies:
- Emergency buffer: Even $1,000–$2,000 in a high-interest online savings account can keep you from reaching for the credit card when the unexpected hits.
- Be BNPL-wise: Only use BNPL for planned, budgeted purchases—and avoid stacking multiple BNPL accounts, which can quickly spiral out of control.
- Review ‘wants’ versus ‘needs’: Make it a habit to pause before non-essential purchases, especially if you’d need to borrow to fund them.
- Check your credit report: In 2025, Australians are entitled to a free credit report from each major bureau every 3 months. Spot errors or signs of identity theft early.
Small changes can have a big impact. As the financial world evolves, keeping your debt in check is still one of the most powerful ways to stay ahead.
