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Good debt, bad debt

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No matter how savvy we get about staying out of debt, sometimes credit and loans are unavoidable. Can you imagine buying a house without a mortgage? The key is to be able to identify when it makes financial sense to use credit – that’s the difference between good and bad debt.

Good debt is credit or a loan used to gain back some kind of return on investment. Some examples include:

  • Student loans used to cover education
  • Loans or credit used towards owning a small business
  • Real estate
  • Investing

Bad debt includes purchases paid for using loans or credit that won’t go up in value or offer a return on investment. Maxing out your credit card for a vacation may be considered bad debt.

Tips for avoiding bad debt:

  • Avoid paying in installments. It may be tempting to use a retailer’s financing plan to buy that new bedroom set. But if you can’t afford to buy it up front, paying in installments may mean paying high interest rates.
  • Don’t use storefront cheque-cashing services or advance tax-refund offers. The percentage fee most charge may seem small, but it adds up over time.
  • Ask your credit card provider if you can get a lower interest rate.

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Next lesson: Your emergency cash cushions