Good Debt vs. Bad Debt and How to Manage Your Spending

Spiralling into debt doesn’t happen over night. It certainly doesn’t just happen to those who know any less. Debt comes in all kinds of shapes and sizes and happens to all kinds of people. There is good debt and bad debt. To figure out how to lower your debt, you first have to figure out what type of debt you’re dealing with.

Good Debt

Good debt is usually an investment in disguise, which will pay itself off eventually. For example, an education will help you earn more money in the future, a home will eventually appreciate in value, a car (more of an indirect investment) will get you to work and save you time.

  • School tuition 

It is easy to be riddled with student debt, especially when pursuing graduate studies. To minimize your exposure to student tuition costs check out local grants in your area. Grants are not just given out for having top marks, grants are often offered for low income families, community involvement, by cultural and religious association and more. Check out this list for education grants available based on university, college and other sources.

If your children are still small, a great way to plan for their post secondary education is through the RESP. The American equivalent of this program is the 529 Plan.

  • Mortgage
chart courtesy of
The real estate market may be shaky in the short term, but the average value of the property increases over the long term. chart courtesy of


A home or an apartment may cost a lot upfront – downpayment, lawyer fees, closing costs – but it is a long term investment which should provide a surplus in assets to your financial status. Real estate values may be shaky in the short term, with unpredictable markets not to mention recessions, but in the long term real estate does have an upward trend in value growth. The chart to the left indicates the average price growth of homes in Toronto since 1995.

  • Car loan

A car is not an investment, in the sense where it will not increase in value over time, which means it will not make you any money. However, a car loan is not necessarily considered bad debt because it serves a long term purpose, gets you to work and other places and best of all saves time, time which can be invested into other more productive activities. Overall, a car does have investment characteristics because it may improve your overall quality of life.

Bad Debt

Bad debt is usually linked to material items which have no investment value (sadly these are all the things I love!). The latest fashion, restaurants, outings, day to day spendings etc. It’s easy to rack up credit card balances on non-essential items such as the latest handbags and couture but it’s not always easy to pay off the credit card balances. A credit card payoff calculator can come in handy when budgeting for the fastest way to pay off your debt. The following are considered to be “bad debt”:

  • Credit card balances
  • Lines of credit and loans with high interest rates
  • Payday loans (the worst)

TIP #1  Declutter your credit cards

First thing you absolutely have to do is close the credit cards you don’t use. It’s recommended to have no more than 2- 3 credit cards, which is plenty to upkeep your credit score and maintain credit history. Many people don’t even know about all the credit cards they have under their name. With limits of thousands of dollars, this poses as a risk of more spending! So close them up for good. Keep one or two credit cards for regular use and maybe a third one for emergency purposes. (no, not emergency sales, I mean actual emergencies) Credit companies may try to lure you in with points and all kinds of credit card features and benefits nonsense, the less credit limit you have the less debt you’ll need to worry about. Keep it simple!

TIP #2 Consolidate

If you have a lot of “bad debt” such as credit card balances, high interest lines of credit finance or loans then there’s the option of combining it all into one lump sum. It’s called a consolidation loan, the bank will put all your personal debt together into one loan, where only one monthly payment is required. It isn’t always easy to be approved for this type of loan, one of the top requirements is a good credit score. Once approved, not only will you save on the interest payments, you’ll pay off your debt much faster.

TIP#3 Start A Savings Plan

Create a savings plan. There is nothing wrong with multi-tasking between saving and paying off debt. Even if you just put away $25-per month in an investment account such as mutual fund, it’ll be a start. The bank will see that you are thinking about the future and have a savings plan in mind. It’s also about building good habits and being consistent about saving money for a rainy day.

TIP #4 Home Equity Line Of Credit

If you own real estate and have equity in home, you may want to consider taking out a line of credit against the equity. This type of line of credit is good to use for your “good debt”, such as post graduate tuition (Master’s degree, PhD), investment property, home renovations or business investments. The interest will be low because the collateral in place (the security of the house) decreases the risk and therefore lowers the interest rate.

Category: BorrowingCredit CardsDay to Day BankingLoansMortgagesTips and Advice


    1. Hi Tara, it really depends, there are a lot of variables. A mortgage is considered a “good debt” so if you are comfortable with the monthly mortgage payments perhaps you can use your savings towards something else, like a family vacation, renovations etc. Some people may be eager to pay off their mortgage to get rid of the monthly payments quicker, however that may take a long time and you may need to sacrifice life’s indulgences (i.e. vacation) to do so!

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Article by: Anna Suzdenkova

Employed in the financial sector for over 7 years. Held various roles including financial advisor, auto claims adjuster and manager of customer service. Attained an accounting degree with Honours. Mutual fund licensed. Passionate about helping people. Forever an optimist, positivity is the key to a happy life. Enjoys helping people decipher the banking world and use it to their advantage!