The Difference between Good Debt vs. Bad Debt: Part One
Traditionally, “good debt” is the sort that helps you gain wealth or income, while bad debt is money spent on goods that are consumed over time. Here’s a breakdown of what is generally considered “good” debt and “bad” debt:
- Mortgages help you build equity in real estate, making you wealthier over time
- Student loans help you increase your earning power
- Business/investment loans make starting up and running businesses possible — they’re crucial to business growth.
- Auto loans for vehicles that lose value the moment you drive them off the lot
- Credit cards have very high interest rates and are largely used to finance consumption
- Payday loans have high interest rates, high fees and contribute to keeping many low-income people in a cycle of debt
But how do you know when if your “good” debt is actually bad? “When it edges into your lifestyle, you have too much debt,” according to a personal finance trainer and blogger. His definition of good debt is different from the traditional model. For him, it’s “a balance you can comfortably pay every month, at a reasonable rate.”
In the next blog post The Difference between Good Debt vs. Bad Debt: Part 2, we’ll take a deeper dive into knowing what good vs. bad debt is.
In the interim, if you’re looking for a credit counsellor in Toronto, get a quick assessment with us today or call us at 416.900.2324. We will help you develop a plan, reduce your interest costs and get out of debt over time.