Good debt and Bad debt…. maybe we Canadians have more good debt?

I saw this recent article about Good debt and Bad debt…  Canadian Personal debt levels have now surpassed $1.5 trillion.  That’s a big number… should we be concerned?  I started to wonder how much of this is Bad debt?  Let’s take a closer look at these stats.

First, let’s define Good debt.. I agree with the article….to me, it’s debt that is used to accumulate an investment or asset….  and if it’s an investment then you may be able to deduct the interest costs from your income, making it tax-deductible…..  investments like a rental property, stocks, bonds, etc would qualify…Borrowing to invest in a rental property is good debt and you can deduct the mortgage interest and other property related costs from the rental income.

Bad debt is any expense where the interest is not tax-deductible and is used to purchase consumer goods… things like borrowing for a vacation, a 60″ TV, that new computer, or leather sofa..etc…  Hey, we all spend some money on these items, the key is to have some discipline.  Borrowing to buy a TV, computer, take a vacation, etc is generally a bad idea… save up for these purchases and then pay in cash.

Now the stats say that $1.5trillion makes up all personal debt including mortgages….  Hey, wait a minute… outstanding mortgage balances recently topped $1trillion in Canada…. If mortgages are classified as Good debt, then let’s subtract this from the total personal debt total of $1.5trillion…

We now have $500billion in potentially bad debt…  So let’s amend the household average debt to $58,000 per family of 4.   Is that really a high number?  And let’s look at our asset base… Guess what?  Our personal asset base is appreciating in value…Here’s a previous article that shows Canadians are borrowing wisely and we just taking advantage of theses record low interest rates to enhance our net worth…  And here’s a more recent article from CBC.ca stating our household credit is growing at it’s slowest pace since 2002.  Good to see some positive news put out by the media.

Remember, Good debt can help you grow your net worth… Bad debt is for personal lifestyle and usually decreases your net worth… We all have some bad debt, we just need to minimize it as best we can.