Debt is often seen as something to avoid at all costs—but not all debt is created equal. Some forms of borrowing can build wealth and open doors, while others can quietly erode your financial stability. Understanding the difference between good debt and bad debt is crucial for making smart money choices and protecting your future.
Why Knowing Debt Types Matters
According to insolvency expert Marc Rouleau of Doyle Salewski, the key to financial health is recognizing which debts work in your favor and which ones put you at risk. Not every loan is bad, but borrowing without a plan—or at the wrong cost—can quickly spiral out of control.
What Makes Debt “Good”?
Good debt helps you acquire assets or skills that increase your long-term value—like buying a home, financing education, or investing in a reliable vehicle. But Rouleau stresses two critical rules:
- It must fit your budget. If a monthly payment stretches your finances too thin, it’s not good debt—no matter how promising it looks. Don’t assume lenders know your limits; always double-check affordability yourself.
- It should come with fair interest rates. Strong credit ratings can lower borrowing costs significantly. For example, a mortgage should never come with a 15% interest rate. Affordable loans with clear long-term benefits are what truly qualify as “good.”
The Risks of Bad Debt
On the other hand, bad debt often provides short-term relief but long-term harm. Rouleau highlights some of the most dangerous traps:
- Payday Loans: These may seem small at first, but the fees translate into annual interest rates as high as 300%—making them one of the most damaging forms of borrowing.
- Owing Money to the CRA: Unlike typical creditors, the Canada Revenue Agency has the power to freeze bank accounts, garnish wages, and place liens on property—making this one of the most stressful debts to carry.
- Falling Behind on Utilities: Missed payments can lead to service cutoffs, which creates urgent financial and personal pressure.
- Credit Card Debt: With interest rates above 20%, unpaid balances can snowball quickly. Juggling multiple cards only makes the problem worse, pushing many deeper into financial trouble.
Building a Smarter Debt Plan
So, how do you make borrowing work for you instead of against you? Rouleau suggests:
- Link every loan to a clear purpose or asset. Borrow to build, not just to spend.
- Avoid debt that adds stress or erodes stability. If it keeps you awake at night, it’s probably the wrong kind.
- Seek help early. If debt feels overwhelming, professionals can guide you through repayment plans, budgeting, and financial recovery strategies.
The Bottom Line
Good debt can be a stepping stone toward growth, but bad debt can weigh you down faster than you realize. By focusing on affordable borrowing, fair interest rates, and clear repayment goals, you can protect both your wallet and your peace of mind.
Smart borrowing isn’t about avoiding debt entirely—it’s about using it as a tool to create a stronger financial future.
