Financial Wellness

Can Debt ever be good?

Although we try to avoid it, debt is something we all deal with to some degree. It could be a student loan, or your first credit card that you went on a shopping spree with, your first mortgage, car loan or household bills that keep piling up. Knowing how to deal with debt is an important skill everyone should have. Lets start with exploring the differences between good debt, and bad debt. 

• Mortgages: You have to live somewhere, so you might as well live somewhere that increases in value almost every year. Taking out a mortgage is something that typically pays off in the long run.

• Student loans: Many people that want an education need help paying for it, and it’s worth it if you are buying an education that will lead to a well-paying, satisfying career.

• Car debt: This can often be considered a bad debt because a car drops in value as soon as it leaves the car lot. However, car loans can be relatively low, and if you need a car to get to work, this can help you get there.

• Business debt: Entrepreneurship is celebrated and encouraged in Canada, and requires both a well thought out business plan and money to back the plan. If you have enough ambition and business acumen, borrowing money to start your own business could be the best investment you’ll ever make.

Bad debt, typically doesn’t add value and often comes with more debt in fees and interest, here are some examples:

• Credit cards: These cards can ruin your financial health with high interest payments. Using credit cards to finance a life that you can’t afford ends up costing you much, much more over time, especially if you can’t pay down your credit card balance.

• Payday loans: Though quick and easy, the short-term cash that you can get typically isn’t worth the finance charges that you will pay.

• Car loans: We talked about how car loans can be good, but choosing to finance an expensive car is not a good move. As a general rule, never finance luxury, in any capacity.         

When evaluating your debt, know that good debt can help your credit score- as long as you are paying according to your payment plan. Some of those bad debt items can hurt your score if you are not paying them back, but they can help you add point to your credit score as long as you are not overloaded with credit debt.  If you are curious about how your credit is affected, take a look at your Credit score through TransUnion or Equifax. It is recommended to view your report once a year to ensure there are no errors, or fraudulent transactions. 

If you are struggling with debt, call a local Licensed Insolvency Trustee, like Bromwich+Smith, for a no obligation, non judgmental consultation.