It can be tough to sort good debt from bad, but insolvency expert Marc Rouleau of Doyle Salewski says there’s a big difference between the two.
“I’ve been doing this a long time, and I’ve been able to discover over the years that people come to us with all kinds of situations,” Rouleau told CTV Morning Live on Money Monday.
When it comes to good debt, Rouleau said the first step is to consider your budget.
“What’s your plan? Is it within my budget to know how much that monthly payment is going to be?” he said. “So, if your lender is telling you, ‘You can afford this,’ back up a little bit make sure that it does fit in your budget.”
Rouleau also said it’s crucial for borrowers to consider the interest rates of their debt.
“This is really important,” he said.
“The better your credit rating, the higher the number is, the lower your rates should be. If you’re spending money, if you’re paying 15 per cent on a mortgage, and I’ve seen this, 15 per cent on a mortgage, that’s way too high.”
Rouleau says there are certain instances where you may need to go into debt, for instance, when purchasing a house or a car.
“Very few people, some fortunately can, go out and buy a house. You need a mortgage for that,” he said.
For Rouleau, acquiring debt that both helps you gain something and fits into your financial plan, is key to good borrowing.
“So, make sure you’ve got with the good debt plan, some asset attached to it or a reason to do it,” he said.
“Get into a situation where you’re getting assets, getting something out of it. That’s the message.”
While borrowing can be helpful in certain situations, Rouleau says that not all debt is made equal and borrowers should consider the source of their debt.
For one, Rouleau suggests avoiding payday loans. According to Rouleau, these small money short-term loans are some of the most expensive that borrowers can get, with interest rates sometimes as high as three hundred per cent.
“It doesn’t really look that expensive. You might pay $50 on a $300 loan. It’s only 50 bucks, but once you break it down, it’s so expensive.
Rouleau also recommends taking account of who the creditors are when going into debt.
“Don’t owe money to Revenue Canada because they have rights no other creditors have,” he said.
“If you don’t pay a creditor, normally what they need to do is they need to take you to court and get the money out of you. If you don’t pay CRA, they can get to the point where they freeze your bank account, garnish your wages, lien your home.”
In addition to the Canada Revenue Agency (CRA), Rouleau also suggests avoiding going into debt with your utilities.
“Utilities turn your cellphone off, turn the lights off in your house,” he said. “You don’t want to the point where you owe utilities money.”
One of the most common sources of bad debt is credit cards, Rouleau warned.
“That’s the one we see most often. A lot of people think that when they get to the limit on their cards ‘well, I’ll just go get another card,’” he said.
“At 20 per cent plus interest rates, that’s the one that’s going to hurt the most on your credit bureau.”
For those struggling to understand or deal with their debts, Rouleau recommends seeking the guidance of a financial professional.
“If this is stopping you from sleeping every day, you need to see a professional,” he said.
“We’ll go through these situations with you, go through your budget, and make sure you have a plan and make sure you have a plan, and you’ll feel much better about yourself afterwards.”
