Debt

Good Debt, Bad Debt?

People don't like debt, but there are few people live without debt nowadays. Your mortage on the house, your car loan, your credit card payments, these are all different forms of debt. The good news is that not all debts are bad thing, only the bad debt is bad for you.

Good debt means the money you borrow to go up in value or increase the earning potential for you, such as the loan you borrowed to purchase a mutual fund, money you borrowed to pay for tuition towards a degree. These debts will not only benefit you in the long run financially, the interest payments on some of these loans are also tax deductible.

Bad debt is the debt you incurred without bringing you any financial return, and quickly deline in value, for example, a vacation, clothing, expensive meals etc.

 
Good or Bad debt?
Interest rates tax deductible?
Borrow to make investment
Good
Yes
Borrow a student loan
Good
Yes (depends on program)
Borrow to contribute to RRSP
Good
No
Borrow to renovate your house
Good
No
Borrow to renovate your rental house
Good
Yes (deduct your rental income)
Borrow a mortage
Good
No
Borrow a car loan
Bad
No
Borrow to pay for personal expense
Bad
No
Borrow on credit card
Bad
No
Borrow on Personal line of credit
depends
N/A

Debt Service Raio
How much you should borrow? The generally accepted guideline is to limit your debt-to-income ratio below 30-35%.
There are two popular debt service ratios: GDS ratio and TDS ratio.

Your Monthly Income
Your Monthly debt payment (at 35% ratio)
(including rent or mortgage, auto loans, minimum credit card payments etc.)
$1500
$525
3000
1050
4000
1400
5000
1750
6000
2100
7000
2450
8000
2800
10000
3500

 

 

Worry Signs to watch for your debt:

Pay off your bad debt

Bankruptcy & Alternatives
As a general rule, bankruptcy should be your last resort because it's difficult to re-establish your credit, and bankruptcy will stay with you for at least seven years.

 

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