Debt: The Interest Rate Is the Enemy

Everything in this track compounds — that’s the good news and the bad news. Savings compound for you; debt compounds against you, and usually at a much higher rate. This module is about triaging the liability side of the balance sheet you built in Module 3.

There is no good debt or bad debt — only rates and purposes

The folk categories (“mortgages good, credit cards bad”) are a decent shortcut, but the underlying logic is two questions:

1. What’s the rate? A peso of debt at 60% annual interest is a five-alarm fire; the same peso at 10% is a manageable obligation; at 4% (a subsidized Infonavit rate for lower salaries) it’s cheap money.
2. What did it buy? An asset that appreciates or produces income (a house, an education that raises your earnings) can justify borrowing. Consumption on credit means paying interest on things that are already gone.

In Mexico the spread between these worlds is enormous: bank mortgages ran roughly 10–11.5% fixed in mid-2026, while revolving credit-card rates routinely sit several times higher — check the CAT (Costo Anual Total) printed on your own statement, and prepare to be unhappy. The CAT, not the “monthly rate” marketing, is the number to compare everything against.

Avalanche vs. snowball

Once you have more than one debt, the strategy question is ordering. Both standard methods start the same way: pay minimums on everything, then concentrate every extra peso on one target debt. When a debt dies, its freed-up payment rolls into the next target (that rolling effect is where the “snowball” image comes from).

• Avalanche — highest interest rate first. Mathematically optimal: every peso goes where it kills the most interest. If your highest-rate debt is a credit card at several times the rate of everything else — the common Mexican case — avalanche wins by a lot.
• Snowball — smallest balance first. Optimal for morale: debts disappear fastest, and each kill frees a payment and a mental slot. Behavioral research and a lot of practitioner experience say people who feel progress keep going.

The honest answer is that the best method is the one you’ll actually finish. See what the difference costs with your real numbers:

Typically avalanche saves real money when rates differ widely, and almost nothing when they’re similar. If snowball’s psychology keeps you in the game, the few thousand pesos of extra interest is a fair price for actually finishing.

Pay debt or invest? The guaranteed-return rule

Paying off a debt at rate r is a guaranteed, tax-free return of r. That makes the comparison with investing unusually clean:

• Debt at 20%+: nothing legal and liquid reliably beats it. Kill it first, before any investing beyond keeping a starter emergency cushion.
• Debt around 10–12% (typical Mexican bank mortgage or car loan): comparable to optimistic long-run equity returns, but the debt’s return is guaranteed while the market’s isn’t. Extra payments are a perfectly rational “bond allocation.” So is investing instead — this is a genuine judgment call about risk, liquidity, and taxes.
• Debt at 4–7% (subsidized rates, or CETES-adjacent): paying early is defensible but not urgent; long-horizon investing has the odds (Module 5 covers what those odds are).

Two exceptions to pure math: always capture free money first (an employer match or deductible retirement contribution beats extra payments on mid-rate debt), and always keep the starter emergency fund from Module 2 — without it, the first surprise expense goes straight back on the card at 60%, undoing everything.

The borrower’s side of the credit score

Everything lenders do with your file — scorecards, utilization ratios, payment history — is covered mechanically in Credit Models Module 2. From the borrower’s side it compresses to: pay on time, every time (payment history dominates every scoring model); keep utilization low (a maxed-out card signals distress even if you pay it); and keep old accounts alive (history length matters). A clean file is worth real money — it’s the difference between the subsidized end of the mortgage table and the expensive end.

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