Good Debt and Bad Debt: Is there a difference?

Traditionally “good debt” is money you borrow to purchase something of lasting value.  A house mortgage is thought to be “good debt”, because your house will increase in value.  Borrowing to contribute to an RRSP may also be good debt.

“Bad debt” would include all other types of borrowing, such as borrowing to go on a vacation, or borrowing on your credit cards to purchase things that you may not need.  With bad debt you may end up paying high interest and have nothing to show for it.

But wait: is there really “good debt”?  Would it not be better to have no debt?  For many people, the answer is yes.  A house is not always a good investment.  If a house can decline in value, does it make sense to borrow money for a mortgage on a house that will decline in value?

Instead of borrowing to invest in your RRSP each year, would it not be better to contribute each month from your savings, so you pay nothing in interest?

Before borrowing, ask yourself if it’s good debt or bad debt, and ask yourself if you can not borrow at all, because no debt is the best debt.

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