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Can you tell good debt from bad? Try our quick quiz:
 September 15 2016     Posted by Tina Meraw

Can you tell good debt from bad? Try our quick quiz:

No one really likes the idea of “debt”. It represents something that is owed: an obligation. But not all debt is actually “bad”. The trick is to have “good debt” and not “bad debt”. Good debt can bring you closer to your financial goals. Bad debt gets in the way of wealth. Can you tell good debt from bad? Try our quick quiz:


CREDIT CARDS: good debt or bad debt

Okay, this is a bit of a trick question. Credit cards are extremely helpful as a way to generate credit history. A great way to establish a credit rating is to activate and use a low-interest credit card. Pay the balance each month, and keep your very first credit card for as long as you can – because it gives you a good long credit history. However, running up your credit cards (past 30% of the limit), and making only minimum payments is a recipe for financial problems. You’ll pay large sums of interest, and find yourself in a battle with unmanageable debt.

MORTGAGE: good debt or bad debt

This one is easier. Mortgages are almost always good debt. Canadians are benefiting from historically low mortgage rates, and real estate is still an excellent long-term investment in most areas of Canada.  A mortgage lets you build wealth in your home by using low-interest debt. Be sure to talk to us first. You’ll want us to shop the broadest range of rates and options for a mortgage that’s custom-tailored to build your wealth as fast as possible.

INVESTMENTS: good debt or bad debt

Borrowing to invest can be good debt if the investments help improve your overall financial position. In some cases, the interest expense on money borrowed for non-registered investments is tax-deductible. Many Canadians will also borrow money to maximize their RRSP contributions. That’s also often good debt, since you’re investing in your future, and benefiting from tax-sheltered investment growth. Always be sure to get professional investment advice; our role is to help you with low-cost borrowing.

CAR LOAN: good debt or bad debt

Here’s an example of a purchase that will decline in value.  A vehicle begins depreciating the moment you drive it off the lot. For many Canadians, a car is a necessity. But a) don’t buy more vehicle than you need, and b) talk to us about using low mortgage rates to cut your overall interest costs on a vehicle purchase.

BUY NOW PAY LATER: good debt or bad debt

Just say no. This “enjoy now” purchasing trap has been a slippery slope for many Canadians in debt. It invariably involves an item (furniture, electronics) which will begin to lose value immediately. Sellers add financing charges to the cost of the item, and often the interest rates – when they kick in – are shockingly high.

How did you score? If you recognize some bad debt behaviours in your own financial habits, don’t panic. But do get professional mortgage advice. A mortgage is still the lowest-rate loan you can get in Canada. If you’re borrowing – for any reason, including organizing your current debt – make us your first stop!

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