What is Good Debt vs Bad Debt?

Most of us hope to be debt free at some point and join the 25% of Canadians who aren’t burdened with that weight. In order for that to happen, we need to deal with the debt we have incurred. Both the good debt and the bad debt. But what’s the difference between good and bad debt? What kind do you have, and why does it matter? 

Wait - Is there such a thing as Good Debt?

You may have heard the terms 'good debt'. How can debt be good? Isn't it all bad? Good debt is a debt you have incurred that will generate future income or something that will appreciate in value. When banks and creditors review your credit report and see that you are making regular payments on good debt, they will look at you in a more favorable light.

Student loans are an example of a good debt. It's going towards preparing yourself for a better career and increased earning potential. After your final semester, it's important that you have a plan in place to start paying off your debts on time, every month. Because if it starts hurting your credit score, it quickly becomes a bad debt.

Related Article - Paying off your student debts? Read our “Student Debt Advice - Pay it Off!“ blog for some advice for paying off your loan.

A mortgage is another example of a good debt because it's considered an investment and should increase in value over time. When you show a record of making monthly payments on this essential debt, your credit score will rise and risk level will go down over time.

Related Article - Looking to purchase a house or condo in the near future? Use our helpful mortgage calculator to see how much money you could be saving by increasing your credit score! 

What is Bad Debt?

Bad debt is the opposite of good debt in the following respects.

• • It is considered to be non-essential debt that carries a high-interest rate.

• • The debt won't generate long-term income.

• • It is debt that was generated to purchase items that will quickly lose their value.

• A good debt that has missed payments or has gone into collections would be considered a bad debt.

Examples of Bad Debt

High credit card debt, payday loans, cash advance loans are examples of bad debt that will contribute to lowering your credit score. These types of debt have very high-interest rates and serve as a signal to creditors that you might be at risk to repay future loans.

Related article: If you are carrying a lot of bad debt, then it is crucial that you start managing it today. Read our article “10 Ways Your Bad Credit History Will Get In The Way Of Your Life” to see how your bad debt will hold you back from living the life you want.

In Between Good and Bad Debt?

Sometimes, debt can fall in a gray area. An example could be an auto loan. If you need a vehicle to survive, or your car is a collectible, it could be a good debt. If you're driving a vehicle outside of your means, you could argue that it's a bad debt.

Get Rid of Your Bad Debt Today

We hear a lot of financial advice and differing philosophies regarding debt management. Our friends, families, and forums on the internet are all resources we can use. Conflicting advice can be confusing and frustrating. The best way to ensure you’re getting the best information is by staying tuned to this blog and by seeking advice from professionals who know how to fix your debt situation.

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