What makes a debt ‘good’ or ‘bad’? Well…that depends. If you’re evaluating your personal finances read on to learn some key factors in categorizing your debts, guidance in prioritizing debt repayment, and where you can safely get qualified professional help in managing your debt.
What Could Make a Debt ‘Good’ or ‘Bad’?
Although some people might argue that having any type of debt is bad and should be avoided, the reality is that credit is a tool and there are times when borrowing does make sense – usually this is when debt is taken on with the expectation of a significant future benefit, a way of investing for the long run. Here are a few common examples of when using credit might be considered helpful ‘good’ debt:
- 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 with increased future earnings.
- Starting Your Own Business: A loan to launch or expand your business can be a useful tool in pursuing profitable growth.
‘Bad’ debt isn’t necessarily bad, but this term usually refers to credit used either for fast consumption or for spending that provides only a brief benefit. Here are a few examples of this type of short-term benefit debt:
- Vehicle Financing: It’s difficult for most people to purchase a reliable vehicle outright, and taking advantage of credit isn’t always a bad thing, but borrowing to buy a car can have downsides:
- Vehicle values begin to depreciate immediately after purchase, so you often owe more than what the vehicle is worth for some time – especially if you don’t make a significant down payment when you buy.
- Car payments can take up a sizable amount of your household budget, and financing terms can regularly extend to over six years.
- Be careful financing a vehicle 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.
- Consumables Bought on Credit: With high interest rates (especially on store cards), charging your credit cards for household goods and purchases you don’t have the cash for is seldom a good use of credit. These goods hardly ever have enduring value and if you don’t pay off your balance in full right away, the true cost climbs very quickly.
Consider Your Personal Finances and Circumstances
Your personal situation and specific circumstances are also 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 can be a huge problem if you borrow too much or experience an increased interest rate such 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 courses of study you are considering.
Why are you borrowing, and what emotions are you experiencing in relation?
- Always consider your needs VS wants and don’t emotionally justify 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.
Pros and Cons of Using Credit – and Tips for Using Credit Well
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’
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 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.
Good Habits for Using Your Credit
It’s a good idea 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?
Licensed Insolvency Trustees are the professionals in Canada who are fully government-qualified, empowered and endorsed to help people with debt. We can assist people with many different debt needs and circumstances, including (but not limited to):
- General information on all your formal and informal options to deal with debt
- Addressing urgent situations or creditor conflict (i.e. Wage garnishment, legal action, etc.)
- How you can restructure or consolidate debt to make payments lower
- You’re interested in some form of debt forgiveness or debt relief
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, so you don’t even have to leave the comfort of home to get support.
There is no cost to get confidential debt advice and insights about your situation; we believe everyone should have confidence in their personal financial planning and how they are managing their money.
You Owe it to Yourself to Get Debt Help
A lot of people who are struggling to manage their debt feel guilty about the debts they accumulated, and often have a lot of 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.
Having a debt problem does not make you a bad person. Financial challenges are not a reflection of your self worth. You deserve to live with dignity and without overwhelming stress.
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.