TurboTax

File with experts
File your taxes
Experts at your fingertips

An expert helps with your taxes, or does them for you
TurboTax Expert Full Service

TurboTax Expert Assist

TurboTax Self-Employed
Prior year taxes
File myself
File myself
Do it yourself

We'll guide you step-by-step
TurboTax Do It Yourself

TurboTax Self-Employed

TurboTax Desktop
TurboTax Free

Activate your product

Prior year taxes
Business
Business
Business taxes

Get your T2 corporate return done right, your way
TurboTax Business

TurboTax Business Desktop
Tax situations
Tax situations
Tax situations

Find extra guidance for your big life moves
For investors

For 25 and younger

For self-employed

For new to Canada

For life changes
Resources
Resources
Resources

Explore tax tools, get tips, and read reviews
Personal income tax calculator

RRSP savings calculator

Learning hub

TurboTax support (FAQ)

TurboTax community
Pricing

Community

RentGuru2018

Question

Is all debt bad?

Forum|Forum|8 years ago
March 21, 2018
38 replies
0 views

Is there any kind of debt that's good to use? Or should I always stay out of debt? Never get a credit card or take out a loan?

BillM223

I've always heard that you should take out a loan or get a credit card, just so there's something on your credit report...that is, someone with no credit history might get as bad a credit rating as someone with a bad credit history.

Is that still true?

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

s44k

You should avoid debt as much as you can, but using credit card wisely can help with credit score. The way I do it is by setting up automatic statement balance payoff for each of my credit cards online from my bank. I use YNAB as my budgeting software to ensure all my expenses can be covered with Cash, both long term and short term. So I always know I’m able to pay off credit cards in full each month. By paying off all my credit card balances a few years ago and using this strategy, my credit score increased from 632 to 800+. I still have Student Loans though which is another story and I’m trying to end that story as soon as I can. I also use credit cards that gives me cashback or airline points. So nowadays, I pay no interest to credit cards and instead get paid back for using them regularly.

Jcaryl

My wife and I both have the same remarks on our credit records. We both have union construction jobs making very good money. 5 years ago we went through a difficult time which incurred a lot of medical bills a few of which went to collections. We paid them off together, at the same time and applied for a credit card. She was accepted for $3700 in credit limit between two cards. I was declined. Since then I was able to get a credit card for $300 but have been declined for anything else. My credit score remains at 580 and hers is over 700. What gives? Is there something on my report that i can't see? Our money is in a joint account and we're share all bills. Our dti is 24% and we have 2 months worth of bills in savings. I am at a loss of what to do.

LudwigVan_fan

Not all debt is bad. Some debt probably can't be avoided. Also, utilizing some debt establishes a credit rating which is necessary these days.

Using credit card debt is not necessarily bad. If you use them responsibly, (by having a plan to either pay it off entirely each month, or, have a plan to pay off in a reasonable amount of time to minimize finance charges) they might be a good use of funds.

Also, buying a vehicle or home might only be achievable by taking out debt. Not that many people can pay cash for vehicle(s) and/or homes.

**Disclaimer: Effort has been made to offer correct information; but due to the discussion forum limitations, the poster disclaims any legal responsibility for the accuracy of the poster's response**

EricG

I agree with @LudwigVan_fan - not all debt is bad and you just need to use it responsibly.

My advice is to make sure you find out what the interest rate is and what the terms of the loan/ credit cards are.

The interest rate is usually called an "APR" - annual percentage rate. This site has a good explanation of what that is and why it matters. Essentially it's what you're going to pay to borrow money.

Here's a quick example:

The loan or credit card has an APR of 15%.

You borrow $100.

At the end of the term (1 year in this example), you'd owe the original $100 plus $15 for $115 total.

That extra $15 comes from the original $100 multiplied by 15% (or 0.15 - another way to write 15%).

That's a very simple example and most loans and credit cards charge compound interest - where interest is multiplied by the new balance each term. This kind of interest, compound interest, can grow VERY QUICKLY!

So be sure you know the interest rate, aka: APR, and the terms - how often the interest is charged.

This is also a decent intro video to the idea.

Carl11_2

It's a personal choice. I gave up all credit cards about 8 years ago, and have never been happier or more at peace since. In that time I've managed to pay off two cars. Having replaced one of those cars 4 years ago with a brand new 2013 Rogue that I paid cash for means I still own two cars free and clear. Also in that 8 years I"ve managed to pay off 1 of the three rentals I have mortgages on. Was great when the insurance company sent me a yearly insurance bill with a 10% increase and I was able to tell them "stick it where the sun don't shine" which promptly resulted in a 20% decrease in that bill.

With only my primary residence and 2 more rentals left to pay off (which is going faster with the rental income from the paid off rental and the fact I have no car payments or credit card payments) I'm looking at being debt free in the next 5 years or so.

I'm tired of working for money and just handing it over with exorbitant interest to lenders. I don't have a problem with paying my share of taxes. But if I'm going to pay taxes on the money my earn, I want to pay taxes on the money I "KEEP", and not the money that is spent before I've even cashed the paycheck.

akhoney29

I agree with Carl - this is the ticket! Great response, easy to understand and positive/proactive. Thank you guys for the breath of fresh air. Debt is manageable but you have to be on it to make it work for you, not the other way around. I'm working on that myself having just bought a new house with a bigger mortgage and wanting to do the yard, but don't want to get in over my head yet. I'm close to paying off my wedding ring and my husband's doctor bills. So close I can almost taste the raised beds and welcoming backyard paradise!

alntoy2

Is there any kind of debt that's good to use? Good debt is Student Loans, Mortgage Loans, and Credit Cards. Student & Mortgage Loans are Installment accounts which is a MAJOR part of your credit report.Credit Cards are Revolving Accounts which is another major part of your credit report.
Should I always stay out of debt? If you are alive you will incur some type of debt. Key thing is to be responsible.
Never get a credit card or take out a loan? While it's certainly possible to do so, you won't have a good credit mix on your report. Creditors use this info to see how responsible you are worth OTHER PEOPLE'S MONEY. If you demonstrate responsible behavior, they will consider you a GOOD risk and won't hesitate to lend you money.

Bob3

Yes, why does anyone need debt? People in today's society think that you have to have debt to survive. It is a lie that creditors spend a lot of money every year to get us to believe. Save your money if you want to buy something. I'm a Soldier for a living with a single income, wife, kids and all of that and I am able to live debt free. If you check my credit score it says that there was no information and there might be an error. Still, I have a home, 2 nice cars and a life. Don't by into all of the marketing from creditors, find financial freedom.

BassGod00

Just never get a credit card until your credit is excellent.

alntoy2

Two subjective terms here....
(1) never get a credit card
(2) excellent
Quantify excellent.
Explain rationale of #1 when one of the criteria for getting to excellent is Revolving (credit) debt.

Robert-Cohen

No by all means get a credit card, but until the scum banks and the scum credit agencies differentiate between purchases and balances don't use it. My credit score is 797. Using the hypothetical tool on Chase's website if I purchase 5000 in the month my score goes down 50 points. Since I pay my bill at the end of the month, why charge, just pay. When the banks want the 2.5% on purchases from me, they can do it my way. Probably won't happen if it's only me. When all of you stop being sheep, it will happen

Anonymous

Calling them scum isn't really helpful. Credit scores are a game, and you just need to learn the rules. Your example of the simulator is relevant for your situation, but you should put it into context. Someone with a $5,000 balance when their total credit limit is $10,000 will have severe credit score effects (50% utilization), while that same $5,000 balance for someone with a total credit limit of $100,000 will have minimal credit score effects (5% utilization). In your example, why not charge it, and if holding the balance at $5,000 is detrimental to you, then pay it down to $1 just before the statement closes. This gets you an actual reported balance on your credit files which helps build your credit history, and if you have a rewards card, lets you earn those rewards as well.

Robert-Cohen

I am sorry, people that are in charge that can change rules arbitrarily are scum. Additionally, the rules are not published but are reported to be an algorithm that's proprietary. I don't see anything fair yet

alntoy2

No.
Debt is necessary. However the amount of interest you pay is totally up to you. The creditors set the APR, however your payments dictate how much interest you actually pay.

ginger2ginger

Debt is a lot like alcohol. Some people can have it and treat it responsibly (pay off bills in full, pay down loans early, don’t take out more than they can afford.) others cannot. For the people that have mismanaged debt, it’s always bad. It needs to go away, and it should be avoided. For people that handle it properly, it’s still not good...how much do you want of your life owed to other people?

CPK

It all depends. If you are like most who are only focused on having a high credit score then all debt is good. A credit score is a person's relationship with debt. Debt keeps you from saving money. There are people with an 800 credit score but have no money in the bank. Even though they have a good salary it gets eaten up by payments they have to make each month on credit cards, car loans, and other consumer debt. In my opinion debt is never a good thing. Financially speaking life is easier when you don't have to pay the bank or credit card companies every month. You will have a healthy emergency fund and you can save up for things you want instead of financing it or using a credit card. If you have debt pay it off as fast as you can and never go into debt again. Mortgage debt is understandable, but even in that case get a home that is within budget and put down as much as you can. I would do my best to avoid debt. I hope this gives you another way of looking at it.

DaveT315

Definitely not. As a general rule, debt used to acquire income generating assets is good debt. Debt used to finance an education that will eventually land you a high paying job is good debt. Debt used to urchase your primary residence is a liability even though it was needed to purchase an appreciating asset. While not good debt, the debt used to purchase your primary residence or the car you use to commute to work is often necessary debt.

Debt used to finance a vacation or purchase things that are consumed (such as groceries) is not good debt. These debts may be needed when you are not in a position to pay cash for everything you consume, but the debt should be kept to a minimum and used responsibly. Credit card debt should be paid off in full every month, or as quickly as possible to minimize finance charges.

Since I am speaking in generalities, let me leave you with one more. Any debit used to support a lifestyle or maintain a status that is beyond your means to service is bad debt. You probably don't need the biggest house on the block in the most exclusive neighborhood. You don't need a luxury automobile to commute to work when a plain-vanilla, second-hand car will do the same job quite effectively. These things are status symbols and the debt used to acquire them could lead to a bankruptcy and/or foreclosure if you are unable to make the payments. I would put this debt in the category of bad debt.

Robert-Cohen

According to how this works, all credit card debt is bad. The understanding used to be that carrying debt and not paying off the balance is bad. Now it's how much you spend. I pay my card off in full every month. If I spend more than 3500 of the 7000 max, my credit score dips 50 points and then the months where my spending is 1500 or less, I get it back. You would think they would want you to spend as they make roughly 2 % on each purchase.
Edited.

CreditDragon

CC debt can be good to help boost your credit as well as some auto loans for people who are just starting out with no credit. You can do a secured card where you give the bank $200 and then they give you a credit card for $200 and then as you use it responsibly they up your limit and eventually you can get your money back.

Your credit score is factored off of how much of your credit balance you use. You want to carry a balance of less than 15% of your CC availability to get the best rating out of it that you can. So don’t spend you limit and make minimum payments that actually hurts your credit.

You only pay interest on your balance! So if you spend $50 on gas for the month in your CC but pay it off before your bill is due, you don’t accrue interest and you use your CC which is good for your credit.

Vehicle loans can also help build credit but you shouldn’t run out and buy a $20,000 car with a $20,000 loan. Save 70% of the car you want and then finance the remaining 30% it will help you have smaller monthly payments and help you pay it off faster and still have equity in the car. This will also help your credit. I’m 27 and have a 760 credit score because I pay off my credit cards every month and am never late on payments