Debt
Debt is any money you borrow with the promise to repay later, usually with interest. Used wisely, it can help you buy a home, finance education, or build a business. Used carelessly, it can strain cash flow, damage credit, and limit future choices. In Canada, debt falls into three broad buckets—secured, unsecured, and government-backed. Each behaves differently in cost, risk, and legal treatment if payments lapse.
Types of Consumer Debt
Secured Debt. Backed by collateral (mortgages, auto loans, home-equity lines). Lower rates because the lender can seize the asset on default.
Unsecured Debt. No collateral (credit cards, personal loans, lines of credit, payday loans). Higher rates; lender’s main leverage is your credit score and collection action.
Government-Backed Debt. Canada Student Loans, CERB overpayments, CRA tax debt. Special rules allow wage garnishment or tax-refund offsets without court order.
Good vs. Bad Debt
Debt that builds long-term value—buying an appreciating asset, boosting earning power—can be considered “good” when the benefit outweighs interest cost (e.g., mortgage, student loan, business loan). “Bad” debt funds depreciating items or everyday expenses and often comes with high, compounding interest (e.g., carrying credit-card balances, payday loans). The dividing line is the return on borrowed dollars versus what they cost.
Key Metrics Lenders Watch
- Credit Score (300-900): Measures borrowing history; 760+ earns best rates.
- Credit Utilization: Revolving balances ÷ limits; keep below 30 % for top scores.
- Debt-to-Income Ratio (DTI): Monthly debt payments ÷ gross income; banks prefer < 40 %.
- Payment History: On-time streak drives 35 % of your score; one 30-day late can drop it 50+ points.
Cost of Debt Spectrum (Typical 2025 Rates)
- Variable-rate mortgage: 6.6 % ±
- Fixed car loan: 7 % – 11 %
- Prime unsecured line of credit: 8 % – 12 %
- Personal loan: 9 % – 25 %
- Credit card: 19.99 % (retail cards 29.99 %)
- Payday loan: $15 per $100 (~390 % APR)
Managing and Reducing Debt
- Snowball Method: Pay minimums on all debts, then target the smallest balance aggressively; quick wins build momentum.
- Avalanche Method: Attack the highest-interest debt first to minimize total interest paid.
- Consolidation Loan: Swap multiple high-rate balances for one lower-rate installment loan.
- Balance-Transfer Card: 0 % intro rate for 6-12 months—effective only if you clear the balance before promo ends.
- Debt-Management Plan: Non-profit agency negotiates reduced rates; you repay full principal over 3-5 years.
- Debt Settlement / Consumer Proposal: Negotiate or legally offer to repay a portion when full repayment is impossible.
Warning Signs of Debt Trouble
- Using credit to cover basic living costs.
- Only making minimum credit-card payments.
- Maxed-out limits or frequent cash advances.
- Rent/mortgage or utilities paid late to keep up with creditors.
- Collection calls, wage-garnishment notices, or court summons.
Building Healthy Credit Habits
- Pay every bill on or before the due date (set automatic payments + reminders).
- Keep utilization under 30 %—ask for limit increases or pay mid-cycle if balances spike.
- Limit hard inquiries; cluster rate-shopping pulls within a 14-day window.
- Maintain a mix of installment (loan) and revolving (card/loc) accounts.
- Review credit reports at least annually for errors (Equifax & TransUnion free by mail).
Debt and Your Mental Health
Persistent debt stress correlates with anxiety, insomnia, and strained relationships. Free, confidential help is available through Credit Counselling Canada, provincial financial-literacy programs, and mental-health hotlines. Talking to a certified credit counsellor or therapist early often prevents deeper crises later.
Frequently Asked Questions
How much debt is “too much”?
If total minimum payments exceed 40 % of gross income or you can’t pay essentials without more credit, it’s time to seek advice.
Will closing paid-off cards improve my score?
Not usually; it can shrink your available credit and spike utilization. Consider keeping old cards open (with no annual fee) and using them occasionally.
Does debt ever expire?
The legal right to sue (limitations period) is 2-6 years depending on province, but the debt remains and collectors can still request payment.
Can I negotiate interest with my credit-card issuer?
Yes—especially if you have a history of on-time payments. Ask for a retention or hardship rate; success varies by issuer and credit profile.
Will a consolidation loan hurt my credit?
The hard inquiry may drop your score a few points temporarily, but lowering utilization and making one on-time payment can boost your score over time.