Debt & Credit

Understanding debt

Not all debt is equal. Good debt finances something that appreciates in value or generates returns over time — for example, a mortgage for a property or an SU loan for education. Bad debt is typically consumer loans, payday loans and credit card debt with high interest rates that do not finance anything value-creating.

ÅOP (annual percentage rate of charge) is the most important figure to understand when comparing loans. ÅOP includes not just the interest rate but also all fees and costs associated with the loan. Two loans with the same nominal rate can have very different ÅOP. Always look at ÅOP, not just the nominal interest rate.

As a rule of thumb: the higher the interest rate, the more important it is to pay off the debt quickly. Debt with an interest rate above 10% should almost always be prioritised over investing.

Avalanche vs. Snowball

There are two popular strategies for paying off multiple debts: the avalanche method and the snowball method.

Example

Imagine two debts: a consumer loan of 20,000 kr. at 15% interest and a car loan of 80,000 kr. at 4% interest. You pay the minimum of 500 kr./month on each and have an extra 2,000 kr. for repayment. With the avalanche method, you put the 2,000 kr. towards the consumer loan (highest rate) and pay it off in about 9 months — after which the full amount targets the car loan. With the snowball method, you would do the same (the consumer loan is also the smallest), but had the consumer loan been larger, snowball would have targeted the car loan first, costing you more total interest.

Mathematically, the avalanche is always best. But research shows that many people find it easier to stick with the snowball method, because the quick wins provide motivation. Choose the strategy you will actually follow — the best strategy is the one you complete.

Danish mortgage types

The Danish mortgage system is unique in the world and offers homeowners very favourable loan terms compared to most other countries.

The right combination depends on your risk tolerance, income stability and time horizon. Many homeowners choose a mix of fixed and variable rates to balance security and savings.

SU loan

SU loans have a dual interest rate structure: during study the rate is approximately 4%, but after completing your education it drops to the discount rate + 1% (typically around 2.6%). The interest is tax-deductible (rentefradrag), which makes the effective rate even lower.

Because of the low effective rate after study, SU loans are rarely the debt you should prioritise paying off first. If you have consumer loans or other debt with a higher rate, you should always pay those off before your SU loan.

During study, however, it may make sense to pay extra, since the 4% rate is higher than many other loan types.

Consumer loans — beware!

Invest or pay off debt?

The classic rule of thumb is: if your debt rate is lower than your expected investment return (often estimated at 7% nominal, roughly 4-5% real), it may mathematically make sense to invest instead of repaying.

But remember: investment returns are uncertain, while the debt rate is guaranteed. Paying off debt at 4% gives a guaranteed 'return' of 4%. Investing for 7% involves risk — the market can fall.

A practical guideline: debt with a rate above 4-5% should typically be paid off first. Debt below 2-3% (like an SU loan after study) can be kept while you invest. Between these thresholds, it is a personal judgement based on your risk tolerance.