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Good Debt vs. Bad Debt

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The word “debt” is usually met with a negative connotation but what if we told you that it isn’t always such a bad thing? This blog breaks down the difference between good/bad debt while highlighting strategies for responsibly managing it. 

Good Debt vs. Bad Debt

When I was younger my mom told me that there were certain “four letter words” that I wasn’t allowed to say. Debt was not on the list, but I ended up adding it to the category myself. Partly due to horror stories I heard about people being in debt and partly from being naïve about how debt worked. Because of this, I didn’t want a credit card or a loan and I bought my first car in cash. It wasn’t until I had a conversation with a financial advisor that I began to learn that there are two types of debt: good debt and bad debt.

It wasn’t necessarily good debt vs. bad debt, but more the management of debt that was good or bad. To help illustrate this, maybe you’ve heard some of the following statements:

  1. Thanks for helping me. I owe you one.
  2. I forgot my wallet, can you spot me? I promise, I’ll pay you back.
  3. Can you work my shift this weekend? Next weekend I’ll work for you.

Each one of these scenarios is a form of debt. When we borrow something with a promise to pay it back, we are in debt until the item is paid back. There is nothing inherently good or bad about these situations. What makes them good or bad is the ability or inability to pay back the debt.

Financial Debt

Just like paying our friend back, when we borrow money from our credit union or bank, we have to determine if we are able to pay the debt back. We must be willing to ask ourselves honestly if we are in a good position to pay back the debt or not? Borrowing money can be a great tool, but if we cannot pay back the debt, it can be incredibly destructive and becomes one of those “four letter words.”

As we can see below, borrowing money can be a great tool:

  1. Student loans allow us to get a higher education before we are 40
  2. Car loans help us with transportation for work, school, and holidays
  3. Credit cards give us access to funds and help build a good credit score
  4. Mortgages allow us to buy that dream home before we retire

Once I understood that debt was not the root of all evil, I shifted my gaze to managing my debt rather than worrying about it.

Managing Debt

When it comes to managing debt, every situation is different. Rather than focusing on how to manage debt, here are some things I do every time I’m looking at borrowing money to ensure I’m able to pay back the money I borrow.

1. Talk to an Advisor: If you only take one thing away from this entire blog, this is it. Always talk to a financial advisor before you borrow money. When you do talk to your financial advisor, listen to their advice.

Anytime I’ve ever had to borrow money, or take on more debt, I’ve booked time to talk through my finances with my financial advisor. This includes before getting a new credit card, increasing my credit card limit, buying a new car or boat, adding overdraft protection. If you don’t have a financial advisor, I would recommend seeking one out like a family physician. Find someone who can stick with you and give you sound advice. My financial advisor knows everything about my finances. She knows how much money I make, how much I spend, my passions, my goals, what I’m saving for, what things stress me out and more. Because my advisor knows me, she is able to advise me.

2. Can You Afford the Debt?: Before you take on debt, either for the first time or you’re taking on more debt, ask yourself (or your advisor) if you’re able to manage the debt. Could you manage the debt if you lost your job or if an unexpected expense came in?

There are options to help manage unexpected debt such as debt consolidation to have a lower interest rate. This is another great reason to talk with an advisor. Financial advisors are experts and may know products and services to help you that you may be unaware of.

3. Paying Off Your Debt

The biggest difference from paying your friend back for a meal and paying your loan or credit card is interest. Interest is the cost of borrowing money. If you are unable to pay back your debts, the interest can quickly add up so it is very important to ensure you are in a good place to manage debt before taking it on. One of the best tips I can give you when it comes to managing debt is to always pay your monthly bill, and if possible, pay off your debt as quickly as possible. Especially credit card debt as the higher interest rates can do a lot of harm if you aren’t careful.

Good debt management means being able to pay off the money you borrow consistently, and if possible, as quickly as you can. Paying of debt quickly helps save you money by lowering the amount of money you will end up paying towards interest.

4. Are You Borrowing for a Need or a Want?

Like we talked about earlier, borrowing is neither good nor bad, but sometimes we can take on unnecessary debt that can put us in a bad position. If we already have a credit card that is almost at the $10,000 limit, then taking on a new debt for a boat might not be the wisest decision. The decision to wait and save some money or wait and pay the credit card off might be the better choice.

Talking with your financial advisor about managing current debt or taking on future debt is absolutely critical. They are the experts. My financial advisor has dealt with loans, credit cards, and debt management for well over 10 years. She has likely seen and heard of almost every situation regarding debt and I rely on her expertise, opinions and advice.

Final Thoughts

Debt is a tool and comes in different shapes and sizes. It can help us with unexpected expenses or help us take our dream vacation. However, when debt isn’t managed properly it can lead to stress, anxiety, broken homes, damaged relationships and so much more.

Everyone’s financial situation and lifestyle is complex and unique. Before taking on debt, you should always talk with your financial advisor who can help you develop a clear plan to manage and pay off the debt so you can take on debt confidently.

Happy borrowing!

Credit Cards 101

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Our world is a little bit different now and so is the way you pay – less cash, more credit cards. But before you sign up for a credit card for the free stress ball or the chance to win an iPad, it is important to know why you should consider a credit card in the first place, how to choose one that is right for you, and understand how to use it.

Why Consider a Credit Card?

If you’ve been living that cash life you may have noticed a shift in preference for people and availability at retailers for a contactless transaction. If you’ve never had a credit card, you’ve probably had to rely on your parents or your friends to hold that hotel room for your annual girls trip or to simply complete your Amazon order. Here are some of the benefits of having a credit card in your wallet:

  • Opportunity to build credit
  • Make purchases online
  • Handle emergencies or unplanned expenses
  • Contactless transactions
  • Ability to put a hold on a hotel room or car rental
  • Ability to earn points and redeem for cash back, travel or merchandise
  • Purchase protection and extended warranty

Before Adding a Credit Card to Your Cart

Stress ball or iPad aside, choosing the card that is right for you is the most important part of the process. Credit cards offer a variety of different features with the key differences between being interest rates, the fees and the rewards and benefits. This page does a great job of breaking down the different factors you should consider when choosing a card:

Compare credit card interest rates

The interest rate, which is the price you pay for borrowing money, may be an important factor to you if you regularly carry a balance. Although, spoiler alert, in the tips for using a credit card section below, I’d recommend always paying your credit card bill in full on-time and avoiding carrying a balance if possible.

Compare credit card rewards and benefits

Many cards offer benefits like rental or travel insurance and rewards programs that allow you to earn and redeem points for cash back, statement balance credit, travel and accommodations or merchandise to list a few popular examples. When comparing, you’ll want to think about which are appealing to you, how often you’d use them and understand how you accumulate points and any limitations to earning the rewards and benefits. This article also includes a few examples of estimating the value of rewards and benefits to help guide you.

Compare credit card fees

Credit card fees can include anything from the annual fee (which usually means the card offers extra rewards and benefits or a lower interest rate), to cash advance fees, to inactive account fees, and more. When choosing a card, make a list of all the fees that could apply and understand which you have to pay and which ones you can avoid by learning how to use your card properly.

There is a lot to think about when choosing the card that is right for you, especially since there are so many options out there. If at any point you’re feeling overwhelmed, I would recommend reaching out to friends, family or a trusted financial advisor to get their opinions and experiences!

Tips for Using a Credit Card

Whether you are a new card user or have had a card for years, here are some tips to keep your credit card game strong:

Pay your bills on-time, in full – not just the minimum

This is something I wish I would have known when I got my very first credit card. Without knowing any better, I thought paying the minimum was standard and I’m still not quite over the fact I let my hard earned dollars go to interest simply because I didn’t understand that I would be charged on carrying a balance.

You will never pay interest if you are paying your bill on time and in full each month. Paying in full can also help you spend within your means. Want to know the real cost of carrying a balance on your credit card? Check out this blog for a breakdown of the actual cost and even better, a tool to figure out how long it might take you to pay off your balance!

Make it a routine to pay attention to your credit card bill

Review your charges – this way you can view and adjust your spending habits as well as report unauthorized charges. Rest assured, many cards have you covered with “Zero Liability” if that were to happen!

Use your card to build credit

Lenders and credit card issuers want to see how you use credit for future lending. Your credit score is determined by how you manage your card, so make purchases, make payments and take advantage of card benefits and rewards. If you display a pattern of being able to pay off your card with no issues each month over a long period of time, lenders will trust you more and will be able to offer you more credit for bigger purchases (ie: house). To learn more about the importance of credit, check out this blog for the building blocks of credit and how to use it responsibly.

Take advantage of the card benefits and rewards

You will want a card that gives you something in return – so understand the card benefits, rewards and features and take advantage! For example, if you’re earning points – use them! I personally love to use my points towards flights to feed my travel bug but while I’ve had travel on pause, I’ve been taking advantage of redeeming my points for cashback straight into my savings account! Some other options for points redemption can include a statement credit or spending them on merchandise items like gift cards to stores and restaurants. What does your card offer?

Sharing is caring, what other tips would you suggest to keep your card game strong? Comment below!

Girl holding a credit card

Building blocks of credit

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Credit isn’t a bad thing if used responsibly and can be a tool that can help your future.

The word credit may be scary or viewed as something negative, but it can be the opposite. Credit isn’t a bad thing if used responsibly and is a tool that can positively help your future. Looking to get a mortgage? How about a loan for a new set of wheels? Building and having a good credit score is essential throughout your life and enables you to borrow money for these life events.

Importance of credit

Building credit is important as it identifies how you manage debt. By paying back the money you borrow with on-time payments, it shows you can responsibly manage debt and sets you up for the future.

A credit score will be given to you based on your credit behaviours. Credit scores range from 300 up to 900 points. When you’re first starting out, you’ll be at the lower end of the range. As you build your credit and display good credit behaviours, this score will increase. A score of 700 or above is considered good while a score of 800 or above is considered excellent. As good behaviours help improve your score, it’s important to note that bad credit behaviours can decrease this score. This score is with you forever, and it’s important you display positive credit behaviours.

You may think playing it safe by avoiding credit all together is the way to go, but in fact, it may be hindering you in the future. Without credit, you can’t show if you can manage debt responsibly which can impact your ability to get a loan, mortgage, etc.

Building credit

Start building credit as soon as possible. Start by applying for a low limit credit card after high school and paying the entire balance monthly. Credit cards are a great credit-building tool and can offer great additional features and benefits above and beyond just helping to build credit. Benefits from credit cards can range from insurance coverage to rewards points and even cash back to help pay your balance!

Good credit behaviours

Remember, good credit means you display positive credit behaviours showing you can responsibly manage debt. You can do this by:

  • Paying your monthly bills (utility, cell phone, etc.) on time each month. Consider setting up automatic payments.
  • Understand your spending and talk to a financial advisor to ensure the credit you have (credit cards, loans, etc.) is manageable and fits within your financial situation.
  • Pay your credit card balance in full each month. Remember your credit card statement ‘due date’ is the date the money is due on the account and payments typically take a few days to process. Make payments at least 2-3 days prior to your due date to account for processing times.
  • Do not apply for multiple loans or credit cards all within a short amount of time. Each time you apply for a loan, mortgage or credit card, the issuer does a hard credit inquiry or ‘a hit’ on your credit score showing that your credit has been checked. Excessive applications could affect your ability to be approved as it may look like you’re a riskier borrower or could be perceived as desperation.

Understanding your credit score and how your behaviours impact this score is important.  You can do a soft inquiry (an inquiry only visible to you and that doesn’t affect your credit score) by using www.transunion.ca. We also recommend speaking to your financial advisor. They’ll work with you to understand your credit and create a plan to help you reach your financial goals.

As you can see, credit doesn’t need to be a bad word. Building and developing good credit behaviours early on, help set you on the right track for life. Contact your financial advisor today to see how credit can be a positive for you.

What questions do you have about building your credit? Ask below and we’ll be sure to answer.