December 6, 2019

Good debts vs bad. Learn the rules and keep to them, say experts.

By Dina O’Meara, Calgary Herald

Sue Styles came to Alberta from Salmon Arm, B.C., with her four children in early 2000 looking for a new start after an acrimonious divorce.

The new life turned out to be one of poverty on a low-paying job in high-cost Calgary and child support that didn’t materialize, with the proud former reporter eventually declaring bankruptcy to clear $30,000 in debt.

The turning point for Styles happened when her son turned 13 and asked to go out to a Chinese restaurant. She was only able to afford a couple of takeout items after collecting bottles from her neighbours.

“I remember driving those bottles down to the depot and thinking ‘this is not my life,’ ” she said. “I must find out something else to do, I need some help, somebody has got to be able to tell me what to do.”

Her story is not unique in Calgary or Canada, where household debt has soared to $1.5 trillion. The figure translates to a debt level of approximately $176,461, including mortgage costs, for an average two-child household, according to a report released mid-June by the Certified General Accountants Association of Canada.

Where most Canadians are getting tripped up is not knowing what is good debt and bad debt, say experts.

Good debt is anything that builds your asset base or gives you the opportunity to build your asset base. Common good debt includes mortgages, investment loans, and student loans, because they have the potential to earn more money, and even a car loan if it is going to lead to a better job.

What is considered bad debt? All consumer debt is bad debt, whether it’s a buy-now-pay-later debt, a balance on your credit card debt or paying for a vacation through a line of credit debt, according to author and television personality Gail Vaz-Oxlade.

People do like to spend money on items they label an investment, such as spending $35,000 to remodel a kitchen “for resale value,” then not moving, said Vaz-Oxlade, star of the television shows Til Debt Do U$ Part and Princess.

Known for her blunt and direct approach to indebtedness, Vaz-Oxlade said self-deception is the most common trait people in debt share.

“So for instance, they’ll consolidate their consumer debt with their mortgage and they’ll say ‘Oh, look, now it’s good debt.’ It’s not,” she said.

“You’re lying to yourself. What you have to do is remember that if you have consolidated consumer debt with your mortgage, that part of the mortgage which represents the consumer debt is still bad debt. And you’ve got to pay it off as fast as possible.”

For years, people have been encouraged to build up their credit ratings by incurring and paying off debt. Key to staying out of trouble is discerning what’s worth getting in debt for and actually paying it off before interest piles up.

In 2004, Styles called a financial company to arrange for bankruptcy terms, then several years later attended free information sessions at Money Mentors, a provincially sponsored credit counselling organization. The courses increased her knowledge about finances, investing and budgeting.

The biggest tip that Tracy Watson, director of communications with Money Mentors, offers is simply to live within your means.

“Be financially literate as well, so you are managing your money and your money is not managing you,” she said. “Have a spending plan set up for the whole household. And one of the key things is for people to learn how to control what they’re spending because it’s very easy to write the numbers down, but harder to keep on top of it.”

It was only after a whirlwind courtship and marriage that Ashley discovered Jeremy was carrying nearly $60,000 in consumer debt.

She had fallen in love with the heavy duty mechanic (names and occupations have been changed) soon after meeting him at a friend’s barbecue.

Ashley took out three new credit cards to help pay off her new husband’s debt, but soon realized bankruptcy was just around the corner, despite both having fairly well-paying jobs.

“They were in my office in tears,” said Craig Zaychkowsky, branch manager at Foothills Servus Credit Union. “They were almost at the point of having their paycheques garnisheed.”

Two credit counselling sessions later, they had cut up all but one credit card each with $1,000 limits and set a maintainable budget — one that equalled their income.

“It’s going to be tight for about five years for them because even with paying it down, they’re going to be extremely tight,” he said. “But at least there’s a way out. When you’re paying 19 per cent, 25 per cent or even 35 per cent on credit cards, the interest compounds and you will never, ever, ever pay those things off.”

The scenario is a common one and getting worse as Albertans who traded on skyrocketing real estate values now have to grapple with depreciated assets, Zaychkowsky said.

Experts point to historically low interest rates as partial culprits in the dive to debt, with lines of credit accounting for 41 per cent of the outstanding debt in Canada at the end of the first quarter of 2011, according to credit rating agency TransUnion.

Lines of credit are the worst thing to happen to Canadians in 20 years, according to David Chilton, who earned his fame as the author of The Wealthy Barber.

“If I was prime minister, I’d shut them down,” Chilton said at a recent conference. “It’s unbelievable how people are abusing these things.”

After making his millions advising folk to pay themselves first and save 10 per cent of their income, Chilton now sees people building up their retirement savings while adding debt through lines of credit. And don’t get him started on home renos.

“People cannot resist lines of credit. And the worst combination in the country is a line of credit and a home renovation,” he told Postmedia News.

“Once they renovate one room, the other rooms pale by comparison, so they go on to the next room and it’s a never-ending cycle of renovation as they get deeper and deeper and deeper in debt.”

Rather than consolidating debt into a line of credit, which can be run up again over and over, Zaychkowsky recommends arranging a consolidated loan with your bank. The loan interest likely will be half as high as a credit card, but more importantly, is not re-advanceable.

“Having an automatic withdrawal from your bank account forces you to pay it down,” he noted.

In retrospect, Styles would have avoided declaring bankruptcy had she entered into an orderly repayment of debt program, such as that organized by Money Mentors. However, she was grateful for the choice, which helped pull her family out of poverty.

Since then, she has filmed a documentary on divorce and its economic impact, as well as published a book for administrators.

Now about to complete her seven-year term of bankruptcy, Styles has taken one personal and important step: In May she was able to give something back to the Calgary Food Bank for the first time.

Life continues to consist of working hard and keeping to a budget, Styles said — with a caveat.

“The budget isn’t what saves you; paying attention to the money and changing your beliefs on what money is for, is,” she said.

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