There are many types of debt you can take on, whether it’s a new car, buying a home, getting a business loan, or using your credit card for a financial emergency.
Some debts are considered “good debt” while other debts are considered bad.
So what’s the difference? And how do you avoid bad debts?
Melissa Leong, author of “Happy Go Money,” said that good debt is debt that goes into something that will improve your financial situation in the long run, like student debt or a mortgage.
Credit card debt in Canada
Percentage of Canadians over 18 with a credit card.
Percentage of credit card holders who pay off their card each month.
Percentage that carry a balance.
Meanwhile, bad debt is debt that does not positively contribute to your financial future and may even negatively impact your financial future like credit card debt.
However, good debt can turn into bad debt if you’re not careful, she said, and debt vehicles, including credit cards, aren’t automatically bad debt.
For example, if you take the biggest mortgage you can get and get poor, it’s bad debt, Leong said, because the cost of your mortgage prevents you from saving for other things such as your child’s retirement or education.
If you pay off your credit card every month, there’s nothing wrong with that debt.
So how do you know if you have good or bad debt?
“Every time you take on debt, it has to be part of a bigger strategy,” Leong said.
It means managing the numbers, factoring in future expenses, and not incurring debt just because you’re entitled to it.
After all, debt is still debt, Leong said – and debt is stressful.
“Your debt is still money that is taken from you every day,” she said.