The good, the bad and the do’s and don’ts of debt

Your guide to better borrowing.

We know talking about debt is about as fun as folding a fitted sheet. But whether you’re starting a new chapter or just want to handle your finances better, knowing what to do (and what not to do) when it comes to debt can make all the difference. So let’s break it down.

Do: Stick to good debt

Good debt works for you and gets you closer to your long-term financial goals. It’s money you borrow today to help you make more money tomorrow.

Examples of good debt

• Student loans. Borrowing to go to school can be worth it if it helps you get a higher-paying job. Just make sure to do your homework and choose a program and payment plan that fits your budget.

• Mortgages. Because homes tend to go up in value over time, buying one can help you build wealth over time. Be sure to factor in things like repairs, maintenance and property taxes when deciding if your budget is ready for home ownership. When the time comes, don’t be afraid to negotiate and compare rates from different lenders. There are also federal and provincial first-time home buyer programs and incentives that can make buying a little easier.

• Business loans. Starting or growing a business can be a good reason to borrow. Just make sure you have a clear and realistic plan about how you’ll make money and market yourself. You may not even need to borrow to get started! Side hustles are a good way to earn extra cash and get a feel for being your own boss.

• Credit cards (used responsibly). Paying your balance in full every month and staying below your limit are great ways to increase your credit score. And a higher score can lead to higher credit limits and lower interest rates, making future borrowing easier and cheaper. Many credit cards also come with useful perks and benefits like extended warranties and price protection. And some can even help you earn cash back or travel rewards.

Do: Learn to recognize and avoid bad debt

Bad debt is debt that doesn’t really help you in the long run. It’s borrowing money for things that don’t grow in value or help your future.

Examples of bad debt

• Payday loans. These small short-term loans can help bridge the gap between paycheques, but they usually come with very high interest rates and can trap you in an expensive and stressful debt cycle. Plus most payday lenders don’t report your on-time payments to credit bureaus, which means this type of debt won’t help you improve your credit score.

• Luxury items. Is that latest and greatest gaming console or designer outfit really worth it if you’re still paying for it long after it stopped being the latest and greatest?

• High-interest personal loans. These can get out of control quickly if you’re not careful.

How to avoid bad debt

It starts with a few simple habits.

• Make a budget. If you’re not sure where to start, start tracking your expenses and give the envelope budget system a try.

• Build an emergency fund. Before buying anything non-essential, make sure you have a safety net for any bad surprises that may come your way.

• Consolidate like a boss. If you’re juggling high-interest loans, think about consolidating them into a single balance transfer or personal loan with a lower interest rate. Non-profit credit counseling services like Credit Canada can be a great help with this.

• Know what you’re getting into. Before you sign on for any kind of debt, read the fine print and make sure you understand the impact it will have on your finances. What’s the interest rate? Will it change over time? Are there hidden fees? How long will it take you to pay back? How will it affect your budget and credit score? Ask yourself why you’re borrowing in the first place and make sure you’ve shopped around for the best option.

How to pay off bad debt

There are two common and useful approaches for paying down debt:

• Snowball. Pay off your smallest debt first to build momentum and motivation.

• Avalanche. Pay off the debt with the highest interest rate first to save money in the long run.

Consistency is key, so be sure to choose the method you’re most likely to stick with.

Don’t: Let good debt turn bad

It’s not enough to just avoid bad forms of debt. Any debt can cause problems if not properly managed. Here’s how to keep things under control.

• Only borrow what you can handle. Crunch the numbers. Don’t sign up for payments that are too big for your budget.

• Know your interest rates. Interest is the price you pay to borrow money. Keep it top of mind when deciding what and when to borrow.

• Watch out for compound interest. The math can get a bit complicated, but think of compound interest as interest on interest. For example, carrying September’s balance into October means September’s interest charge gets added to October’s balance (and interest calculation). Until it’s paid off, your balance will keep increasing each month – whether or not you make any new purchases.

• Pay on time and in full. This will keep your credit score happy and save you money on interest and fees.

Tip: If paying off your whole balance isn’t possible, do your best to still make minimum payment. You’ll still be charged interest but you’ll avoid late fees and penalties.

Early warning signs your debt might be going bad

Bad debt can sneak up on you and the earlier you catch it, the easier it will be to fix. Watch out for these red flags:

• Saving money, even small amounts, doesn’t feel realistic or possible

• You find yourself making minimum payments more often than not

• You’re avoiding opening your mail or checking your balances

If this sounds familiar, it might be time to buckle down and make a plan. It can feel intimidating, but it just takes a few small steps to start your financial recovery.

Don’t: Get discouraged. You’ve got this!

The key to managing debt like a pro is persistence, budgeting and borrowing wisely. With smart planning and good habits, you can take control of your finances and make debt work for you and your financial future.

^* If Quick Check pre-approves a card, you can be sure we’ll approve your application, except in limited circumstances. Some of the reasons we may not approve your application, among others, include:

a. There’s been a change in your credit file information, personal information or financial status from the time you receive your Quick Check results to the time you apply for one of our credit cards.

b. You’re not at least the age of majority in the province or territory you live in.

c. Your application is flagged for fraud prevention.

d. You have an existing Capital One account.

e. You’ve applied for a Capital One account in the last 30 days or had an account with us that was not in good standing in the last year. In good standing means not past due, over limit, fraudulent, restricted, or part of a consumer credit counselling program or bankruptcy.

In some cases, we may not be able to open an account for you even though your application was approved. This can happen if we’re unable to verify your identity, or you don’t provide the required security funds if you’re approved for a Secured Mastercard®.