Debt is getting its share of press time these days. It’s not always portrayed in a positive light. But consumers need to know that there is both good and bad debt. The trick is to know the difference between them, notes Russell Nagano from CCG Personal Wealth Management, based in Toronto.
Credit card debt usually ends up on the bad side of the fence. Much of that debt is racked up by spur of the moment purchases that accrue high interest if not paid up right away. The more money on the card, the more you are out of pocket.
Your mortgage, on the other hand, is considered a good debt. You are paying on something that will appreciate overtime, so you’re not loosing money in the bargain, at least not usually. Home equity loans, a related source of debt, can be good or bad. If you use them diligently and pay back the money on a timely basis they usually end up on the good side. Keep the balance high and you are on the other side of the fence.
Think of it this way. Good debt happens when you invest in something that will appreciate in value, like a home or condo. Bad debt is what you owe when you by something that depreciates. Either way, interest accrues, which can be painful when higher interest rates return.
Good vs. Bad Debt
RRSP loans work for people that are disciplined as far as money matters go. Using your RRSP refund to pay back part or all of the loan principle is one way to get that debt paid off sooner. The target should be to have the loan paid at the end of one year. Banks do offer longer terms sometimes, but you really don’t want to carry RRSP loans too long.
Car loans, even though they are for necessary transportation in most cases, are considered bad debts because cars depreciate. Pay cash if you can or shop around for one of those zero percent car loans that are currently on offer. If you go the loan route, take the cash you would have spent on the car and invest it. You’d be ahead in the money department at the end of five years, instead of just owning that car.
Student loans are considered a good debt because they are an investment in the future. Education means larger paychecks and more opportunities down the line. But, consider carefully your field of interest. Getting a student loan for thousands of dollars for a degree that does not have much income potential could be problematic.
Credit card can be great in a pinch, but if the balances are allowed to grow they can become a bad debt very quickly. If you are in a situation where the payments are weighing you down, consider getting a consolidation loan using your home equity. The interest rates are lower and you will get the money paid down that much quicker.
The Canadian Institute of Chartered Accountants did a survey in June of 2012. Results showed that 50 percent of Canadians think that paying down debt is important. Some 48 percent thought they would have trouble paying their mortgage if interest rates increased dramatically. Nearly 43 percent carry credit card balances, and almost 17 percent have had to borrow funds for living expenses.