What’s the Difference Between Good Debt and Bad Debt?

Credit can be a useful tool in the right circumstances, and there are times when borrowing makes sense, usually when a debt is taken on with the expectation of a significant future benefit. However, according to many experts, there are several debts that should be approached with caution, if not avoided altogether, as they run a higher risk of turning into a major financial problem for consumers.

What could make a debt ‘good’ or bad’? Are you carrying a debt that could be deemed risky? Read on to learn some key points about different types of consumer debts, what to watch out for when it comes to debt, and what you can do if you find yourself struggling to pay off your debt.

Common Problem Debts – Most Risky for Consumers 

According to the 2025 BC Consumer Debt Study conducted by Sands & Associates, the following three types of debt were the most common types of debt insolvent consumers carried at the time they made a Consumer Proposal or filed for bankruptcy.

These types of debts can point to an urgent debt problem, either present – or waiting to reveal itself:

Carrying a Credit Card Balance

Because of the high interest costs of borrowing, if you’re not able to pay your credit card balance off in full each month it’s easy for credit card debt to snowball. Even over a short time, purchases can become incredibly expensive.

• With an interest rate of 24% (a mid-level rate for most bank and department store cards) your debt will double every three years!
• Where your regular income is insufficient to meet your household costs of living and debt payments, the ‘borrow-repay-borrow’ cycle can be almost impossible to break.
• Making only minimum monthly payments (or slightly more than) means even a relatively small balance can take years or even decades to pay off.

Taking Out Payday or ‘Fast Cash’ Loans

Payday loans are usually a ‘last resort’ type of debt used to meet daily living expenses in a hurry. Because the borrowing fees and interest charges on payday loans are extremely high, using payday loans or ‘fast cash’ advances creates a major risk of kicking off a borrowing cycle that can be even more difficult to stay ahead of than credit cards.

• This type of borrowing often leads to people carrying multiple payday loans. It’s not uncommon for people to become trapped in a cycle of payday loans, or to have up to a dozen different loans outstanding at the same time.

Having Unpaid Canada Revenue Agency Debt

Whether an unpaid balance for income taxes, business GST, or CERB overpayment – an outstanding government debt is not to be taken lightly.

• The government has powerful collection actions at their disposal, and, unlike many other creditors, Canada Revenue Agency can start collection actions virtually overnight.
• You may not learn of pending action until it is already in place, including wage garnishment/seizure, a bank account freeze, or a lien placed on your property.

If you find yourself unable to repay your government debt, or in a situation where collection action is escalating, talk with a Licensed Insolvency Trustee as soon as possible.

Learn More About Solutions for Having Government Debts Forgiven

Consumer Debts to Be Cautious Of 

Other types of consumer debt should be approached with caution, particularly when it comes to managing your existing debt payments, including:

Getting a Co-Signed Debt

As Licensed Insolvency Trustees, we’re regularly asked when it would be advisable to co-sign a debt for someone else – our answer: almost never!

• Co-signed debts are not a 50/50 liability as many people believe – each person on the account is responsible for 100% of the unpaid debt if the other person does not pay. This is known as “joint and several liability”.
• Getting a co-signer when you’re already struggling financially often just introduces additional layers of stress and emotional responsibility – you’ve now given that creditor another responsible party to pursue for payment.
• Conversely, if you’re considering co-signing for someone else, understand that you are potentially letting someone else impact your overall financial commitments and credit rating.

Using Your Assets as Collateral

Lenders may require you to give them security over an asset to get a loan, especially if you’re trying to consolidate your debt.

• Like co-signing, in the event you are unable to meet your repayment terms, your creditor now has additional recourse to collect upon the debt, which could include seizing and forcing the sale of the asset.
• Be especially careful before taking on additional charges against your home equity – you only have so much to borrow against, not to mention potentially leaving yourself vulnerable to an interest rate increase or downturn in the housing market.

Financing a Vehicle and Other Purchases 

Rather than paying the entire purchase price up front, many people finance a vehicle and other goods, which is not necessarily a problem, but borrowing to buy a car, electronics, or appliances can have downsides when you make an unaffordable purchase ‘affordable’ by stretching out payments over a longer term. Consider: 

• The value of vehicles and other items begin to depreciate immediately after purchase, so you often owe more than what the purchase is worth for an extended period of time – especially if you didn’t make a significant down payment at the time of purchase.
• Car payments and other rent-to-own payments can take up a sizable amount of your household budget, and financing terms can regularly extend to over six years.
  • Be careful financing with a co-signer. Many people fail to realize the full commitment of joint vehicle financing because the other party plans to be the primary insurer and driver.
• Goods purchased on rent-to-own plans are often more expensive and can include extra charges and fees.

What’s the Best Way to Consolidate my Debt?

Debt That Can Be Helpful – If Managed Well

Using credit can be helpful – that is ‘good’ debt – when it’s taken on with the expectation of a significant future benefit, or a way of investing for the long run. For example:

• Buying a Home: Since housing is a necessity and you are investing and building equity in a property that would be expected to increase in value over time, taking out a mortgage is often considered useful debt.
• Paying for Education Costs: Student loans to fund education that establishes or boosts your career is another type of potentially beneficial borrowing if you expect to get returns on this investment through your increased future earnings.
• Starting Your Own Business: A loan to launch or expand your business can be a useful tool in pursuing profitable growth.

Before You Borrow – What to Consider

Your personal situation and specific circumstances are a key factor when evaluating your debt load or potential future debts. Consider the following:

Can you consistently afford the payments required to repay the debt on time, and in full? 

Even a useful debt can end up a ‘bad’ debt if you can’t afford the payments.

• Take a mortgage for example: This typically ‘good debt’ can become a huge problem if you borrow too much or experience an interest rate hike to the point that your regular monthly payment becomes unaffordable.
• Student loans can later be a problem if you borrowed heavily but don’t get the expected increase in earnings.
  • Always be careful not to borrow more than you need and take time to carefully research the career ladder realities of studies you are considering.

Why are you borrowing, and what emotions are you experiencing?

• Always consider your needs versus wants, and refrain from emotionally justifying your spending.
  • Are you using credit for a true ‘must-have’, or could this be a ‘want-to-have’ that you’re feeling emotionally caught up in?
• Avoid impulse purchases, especially if you are borrowing to acquire them.
• It can be difficult to get into a new habit of scrutinizing purchases you’re considering – don’t be pressured or swayed by advertising, whether sales or credit offers.

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Pros and Cons of Using Credit

No matter what debt you are taking on there can be pros and cons, many of which will be strongly influenced by how you use your credit. Some pros of credit may be:

• Not needing to wait to save up cash needed for major goals (like education or buying a home).
• Earning perks and rewards on day-to-day purchases you were going to make anyways.
• Building a positive credit history that can help with future borrowing at ‘best rates’.

7 Signs You Should Deal with Your Personal Debt – Now

Having credit as a resource to help with unexpected expenses may be a ‘pro’ but understand this can quickly turn into a ‘con’ if you struggle to pay the debt off – especially since the impacts of an emergency can disrupt your finances for quite some time. Other common cons to credit may include:

• It costs money to borrow because you pay interest. For example: credit card interest increases the true cost of purchases if you don’t pay the charge off in full right away.
• Debt repayment takes money away from yourself now and in future, leaving you less for other needs and goals.

Tips for Using Your Credit Well

It’s important to hit pause and take time to get grounded before moving forward with purchases made on credit.

• Detach from the excitement and feel-good rush of buying; check in with the realities of your budget and financial goals. Realizing that new debt repayment will set your finances back in other areas can be sobering.

Using credit to your best advantage, you might also consider habits such as:

• Keeping borrowing limits low to avoid the temptation of using more than you need (or can afford).
• Not using credit for transactions that don’t have an interest-free grace period, such as cash advances or lottery ticket purchases.
• Always paying more than the minimum monthly payments required on your credit cards.

It’s also essential to ensure your budget is well-balanced and that you have a solid plan for paying off your debt. Without either of these you’re likely to struggle with virtually any type of debt, even the ‘good’ ones.

Where Can I Get Help With my Debt, or Advice on my Debt Situation?

If you have concerns about your debt and especially if you find yourself in a recurring debt-loop, unable to repay government debt, or facing collection action, reach out to a local Licensed Insolvency Trustee right away. You can safely get confidential advice from an unbiased professional by contacting a Licensed Insolvency Trustee for a free debt consultation.

Sands & Associates’ Licensed Insolvency Trustees work with people across BC, and we offer our services in-person from local offices throughout the province, as well as online or over the phone.

There is no cost to get confidential debt advice and insights about your situation – we believe everyone should have confidence in managing their money and personal finances.

You Owe it to Yourself to Get Debt Help

Many people struggling to manage their debt feel guilty about the debts they accumulated and often have embarrassment and shame around being unable to pay them off.

The idea of discussing your situation with someone who is essentially a stranger, professional or not, can be uncomfortable – and taking the first step of reaching out for help is often the hardest part.

You do not have to struggle alone with your debt. We understand that despite your best efforts and intentions it is not always possible to repay your debts as planned, and there are options to help you deal with your debt in a way that is manageable and affordable so you can move forward with your life.

Connect confidentially with a friendly local expert – your debt-free future could be closer than you think! Book your free, non-judgmental consultation with Sands & Associates today and get a debt-free plan that’s right for you.