05/27/2015 12:33 EDT | Updated 05/27/2016 05:59 EDT

Be Good to Debt and Debt May Be Good to You


Debt has been in the news a lot lately. The major news outlets in Canada are paying attention to our record-high household debt levels and are doing some fantastic reporting about the effects of oil prices, housing, health, divorce, and all the other factors that can damage a family's bottom line.

Yet amid this rabble of expert voices and real Canadian tales of debt crisis, there was one lone dissenter: Philip Cross of the Fraser Institute. Cross took a contrarian view and said stories about dangerous Canadian debt levels are "overblown."

When Cross finished talking about responsible debt levels and rising assets, media attention swung back toward people like myself and other members of the debt counselling community. Surely we'd be beating our chests and yelling about debt-to-income ratios, right?

Well, I wasn't. I actually agree with a lot of what he said.

No Need for Encouragement

I take issue with some of it -- Canadians are clearly stretched too thin in many cases, and seeing a "don't worry about it" headline might be reckless in some ways. Low interest rates are tempting enough, as are the "zero per cent" car financing options or the desire to get into some of the hot housing markets across Canada while the getting is good. We already have plenty of encouragement to take on debt; we probably don't need an authoritative voice telling us it's fine.

At the same time, by noting that Canadians are strengthening their balance sheets by using debt to create wealth, Cross helps me make the point that I'm always trumpeting: stay away from bad debt.

Not All Debt Is Created Equal

Sure, net worth is rising across the country, but not all Canadians are riding that wave. You can either sink or swim in debt, and those that are sinking are those who are using credit to buy depreciating assets. Stats show that half of Canadians are living paycheque-to-paycheque and very few are saving money.

Those people may find themselves forced to use credit to take on debt that will never appreciate in value; such as day-to-day expenses like groceries and cell phone bills, or big-ticket car purchases that devalue as soon as you drive them off the lot. In fact, by using credit, these items actually cost more over time. The Bank of Canada's interest rate might be rock-bottom, but your credit card's interest rate is still high. A restaurant meal will only appreciate in cost, not value, if you are carrying a balance with a 19 per cent interest rate.

Be Good to Debt and Debt Will Be Good to You

In order to fit into the Fraser Institute's picture of the responsible debt user, we need to treat debt as a tool and not as a fallback. Make sure you're building a savings account bit by bit each month (automating it makes it much easier) so that you have a safety net and you don't need to rely on credit to pay for your vet bill. Think carefully about the amount of debt you can take on and leave a buffer between what kind of credit you qualify for and how much can actually afford, knowing that interest rates will rise and housing markets can be unpredictable.

And most of all, think very carefully before you hand your credit card to the waiter because there's no chance an asset will appreciate inside your stomach.


Consumer Debt Per Person (2014)