Bad Debt (MNP 3 Minute Debt Break)

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ebt can be a double-edged sword. On one hand, it can be a valuable tool to build credit and achieve financial goals, like buying a home or pursuing higher education. On the other hand, bad debt—like unmanaged credit cards and payday loans—can spiral out of control and lead to significant financial stress if not managed carefully.

So, how do we differentiate? Good debt—such as real estate, student loans, or investment loans—has low-interest rates and can help grow your net worth. Bad debt, like unmanaged credit cards and payday loans, carries high-interest rates that can quickly inflate what you owe. If you’re only paying the minimum or letting balances grow, you’re in a danger zone.

Let’s dive into the five warning signs of bad debt that everyone should watch for:

You’re only making minimum payments. While it’s better than nothing, minimum payments barely touch the principal. This can extend repayment for years, even decades, especially for larger debts.

You’re using debt for basic expenses. Relying on credit cards for essentials like groceries and gas, without paying off the balance monthly, can be a clear sign you’re living beyond your means.

You can’t afford to save. Using the 50-30-20 budgeting rule, 20% of your income should go toward savings. If debt payments consume that portion—or more—it’s likely time to reassess.

You’re applying for new credit cards or increasing limits. If you’re maxing out cards or considering new ones just to keep up, your debt is likely becoming unmanageable.

You’re dealing with debt collectors. Calls from collectors or threats of legal action mean it’s time to act fast. Ignoring the problem will only make it worse.
If any of these sound familiar, it’s time to take a closer look at your finances. But don’t panic—there are steps you can take.  Start with a budget. Track your income and expenses to see where you stand and identify areas to cut back.

Trim unnecessary costs. Channel savings from discretionary spending—like dining out or entertainment—toward paying down debt.
Build an emergency fund. Even small, regular contributions can create a financial cushion and prevent future reliance on debt.

For those feeling overwhelmed, you’re not alone. Canadians collectively owe over $91 billion in credit card debt. If your debt feels unmanageable, consider reaching out to a Licensed Insolvency Trustee. Options like debt consolidation or an insolvency filing can help you regain control. Bad debt doesn’t have to define your financial story—it’s just a chapter, and a Licensed Insolvency Trustee can help you turn the page.

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