Debt - The Four Letters we Dread the Most
If there’s something we all hate, it’s debt. Whether we use debt for the “right” reasons like bills, schools and housing and some may argue its hard in this day and age to live debt free – debt is a thorn in our side. It forces us to repay the principal and interest and hinders our ability to make investments and other financial moves.
With interest rates at an all time low, many have argued that now is the best time to borrow. I do not disagree with this but must stress it is the best time to borrow and not get into debt. What we fail to realize is the savings generated with lower interest rates should be used to pay down debt or used for other investments – not other endeavours.
If you don’t believe me check out this article looking at top 9 reasons Americans went into debt last year
In this week’s article, I will be breaking down debt – looking at “good” vs “bad” debt and following that up next week with methods on how to cope with debt without sacrificing your financial goals.
Credit Card Debt - the worst of its kind
If there’s one thing you recall from this week’s post its that credit card debt is the worst kind of debt to have. The rates are absurdly high and spending can spiral out of control if you don't have a plan. Obviously there is a right way to use your credit card to maximize benefits ( my previous article) but racking up debt is not. At 19.99% interest annually, CC debt should be avoided. Even carrying a 1000$ from year to year on your credit card will cost you 200$ annually in interest. Paying the bare minimum of 10$ a month may seem attractive but it comes with a heavy burden. Paying off the 1000$ with minimum payments will take over 7 years – with 611$ in interest payments over that span.
Where do mortgages and student loans fall?
Mortgages and student loans form that gray cloud. At its core it still qualifies as debt – but its use is highly justified. Both are non- deductible (student loans depending on the context) but the interest rates are manageable. The best options here are to evaluate your options considering your terms and payment schedules. With rates at all time low, it may be a good time to look at a variable or floating rate where the rate fluctuates with the market conditions.
In next week’s article, I will be taking a look at how to convert more of your debt to “good debt” and structuring your debt in advantageous ways to save on interest payments.
Disclaimer: All of the above information is my own personal opinion. Please verify with CRA regulations to determine which interest expenses are deductible and non-deductible. Please do your due diligence before switching loans and consult with appropriate institutions regarding interest rates.