A guide to understanding debt

Whatever your financial situation, whether you need to pay for school, cover an unexpected expense or finance a project, debt is likely something you need to consider when managing your personal finances. But do you know the difference between good debt and bad debt? How much debt is too much? What is debt consolidation? This guide will give you a better understanding of what debt is by exploring the different types. It will also help you assess your own financial situation, clearly and confidently.

Debt is money you owe to creditors, like your financial institution. It’s a fundamental aspect of personal finance. It includes loans and other accounts payable that must be managed carefully to avoid long-term impacts on your ability to borrow in the future. Debt can take many forms, like:

• A student loan to pay for school

• A credit card to manage an unexpected expense

• A mortgage to purchase a home

• A personal loan to cover a major expense (car loan, etc.)

When managed responsibly, personal borrowing is a normal part of your financial life—it's not necessarily a bad thing. What matters is the reason for your debt and your ability to pay it back.

In many cases, taking on debt isn’t about overspending, it’s about meeting real needs. Understanding debt and its root causes is the first step to gaining control of your finances. Some of the most common reasons for taking on debt include:

• Paying for education: Tuition, books, housing and food

• Buying a home: A major life event that generally requires a mortgage

• Going through a separation or divorce: The situation may involve legal fees, not to mention various shared expenses that will now have to be covered individually—you’ll have to review your budget

• Losing your job or having unstable income: Some temporary debt may be needed to help cover essentials

• Covering unexpected expenses: An appliance breakdown, a leaky roof, dental care not covered by your insurance or an emergency visit to the vet

That’s why it’s wise to plan ahead by updating your budget and building an emergency fund.

Having too many of these types of expenses all at once can quickly lead to over-indebtedness, especially when a person has little or no disposable income. Fortunately, tools and support are available to help you anticipate, plan and stay on track. 

Good debt creates value or supports your future plans. It may involve a student loan to continue your education, a mortgage to buy a home or a loan to start a business. 

Bad debt places undue pressure on your budget without creating any value. It’s when you only make minimum payments on a credit card each month or you rely on a line of credit to buy Christmas presents.

It’s important to stay on top of your finances. Start by creating a personal budget. This will help you determine what’s realistic, adjust your spending and set savings or repayment goals. If you’re juggling several types of high-interest debt, it might also be a good time to explore whether a consolidation loan could simplify your payments and reduce your overall interest costs.

Debt comes in many forms, each with its own characteristics. Understanding the differences can help you manage your financial commitments more effectively.

The most common type of debt is credit card debt. It includes unpaid credit card balances, personal loans and lines of credit used to fund purchases. Though convenient, this type of debt often goes hand in hand with higher rates. And the longer you take to pay off your credit card debt, the more interest expense you end up paying. That’s why it’s called bad debt.

If you want to buy a home, chances are you’ll need to take out a mortgage loan. This type of debt is generally considered good debt as it can be used to build value, or equity, over time. 

Mortgage debt is often associated with lines of credit, such as home equity lines of credit, which allow homeowners to borrow against the equity they’ve built in their property. This type of revolving credit can be a flexible financial tool for managing large expenses, consolidating debt or funding home renovations.

Student loans can be a lifeline to pay for higher education. While student loan debt is often seen as a long-term investment, you will need to carefully budget to ensure timely repayments once your studies are complete. So, it’s essential to plan what your repayment strategy will look like after graduation. Learn about solutions to paying off your student debt.

This type of debt occurs when you owe money to the government for unpaid income tax or when you need to pay back money received by mistake. If you don’t pay on time, you might have to pay extra fees or interest.

One of the most important distinctions in personal finance is the difference between secured and unsecured debt. Secured debt is a type of loan that is backed by collateral—an asset such as your home or car that the lender can claim if you default on your payments. Common examples of secured debt include mortgages, car loans and home equity lines of credit. Because the lender’s risk is lower, secured loans typically offer lower interest rates. 

In contrast, unsecured debt does not require any collateral. It includes credit cards, personal loans and student loans. Since lenders take on more risk with unsecured debt, interest rates are usually higher.

Understanding how secured and unsecured debt work can help you make smarter borrowing decisions and avoid potential financial pitfalls. 

Having some debt is normal. But if debt repayment starts to consume too much of your monthly income—and you’re looking over your shoulder for debt collectors—it may be time to reassess and consider a consolidation loan. Fortunately, there are a few simple indicators that can help determine whether you have a healthy financial situation or you need some debt relief in the form of debt consolidation.

Check out our Manage debt tool. It can help you gain clearer insight into your debt situation and make it easier to plan your future spending.

The debt-to-income ratio (DTI) is a key debt calculation tool for gauging the balance between what you owe and what you own. It shows what portion of your gross income goes toward repaying your debts each month.

A high DTI ratio may signal financial pressure, even if you’re still able to stick to a payment schedule. In general:

• Below 30% is considered healthy

• Between 30% and 40% is a sign to stay cautious

• Above 40% will make it harder for you to qualify for new credit on favourable terms

For example, if your monthly debts total $1,000 and your gross monthly income is $4,000, your debt ratio is calculated as follows: 1000 ÷ 4000 = 0.25 → 0.25 × 100 = 25%.

You can get information on your debt level and personalized financial advice to help you effectively manage and repay your loans.

Here are some tips you’ll find in the Manage debt tool (available to AccèsD users):

• Make extra payments on high-interest debt, where applicable, to speed up repayment and pay less interest.

• Review your credit cards to make sure you have one that suits your needs. 

• Set up pre-authorized payments so payments are made automatically, helping you avoid late fees.

• Build an emergency fund to set money aside.

Our personal finance team is here to help—based on your financial goals and circumstances.

When debt starts piling up, the warning signs can become hard to ignore. You may experience constant financial stress, miss payment deadlines, borrow to repay existing debt and struggle to save, even a small amount.

These are all red flags that you may be carrying too much debt and have insufficient disposable income. Recognizing these signs early is key to avoiding more serious financial consequences. Ignoring missed payments can lead to debt collection notices or calls from debt collectors, which may negatively affect your credit score. 

If you're struggling to stay on top of your financial obligations, don’t wait to seek debt relief. Contact your creditors as soon as possible and think about seeking consumer credit counselling. A credit counselor can help you create a debt management plan or make a payment arrangement that may help you avoid dealing with a debt collector and protect your credit history. There are solutions for debt relief—and the earlier you take action, the better your chances of regaining financial control.

Your credit score is based on information in your credit report. It reflects the overall health of your credit history, including how you manage your payments and loans. 

A poor credit report can make it harder for you to get approved for future financing. It can also affect the rates you’re offered and put you on the debt collector radar. Taking care of your credit score is key, especially if you have future borrowing plans, like getting a car loan, buying a home or taking out a second mortgage.

Some debt can become problematic not just because of its size but how it’s managed. Even smaller balances can spiral out of control if ignored.

Using a credit card for an unexpected expense, like a car repair, may seem practical at the time. But once that interest kicks in, the balance can grow quickly and put other plans on hold. A solid repayment plan (plus a little guidance from your financial advisor) can make all the difference.

Sometimes even small balances can reduce your working capital, your ability to cover short-term essentials (rent, telecommunication bills, power bills, etc.).

Want to pay off your financial obligations but don’t know where to start? You don’t need a huge amount set aside to take the first step. There are simple, accessible strategies that work for a variety of situations, even on a tight budget. They can help you make the most of your money while reducing what you owe.

Start by listing all your outstanding balances: total amounts owed, interest rates and minimum monthly payments. This overview will help you build a practical and realistic repayment plan based on your disposable income.

Choose the strategy that works best for you:

• Avalanche method: Pay off debts with higher rates first. This approach helps you save money on interest charges over the long term.

• Snowball method: Pay off smaller debts first. This strategy can be motivating because it offers quick, visible wins.

If you're unsure which method fits your financial situation, a financial advisor can help you evaluate your budget, goals and debt load to build a personalized payment schedule. Whatever you choose, keep your regular monthly payments consistent, even modest ones. Staying on track is what matters.

Debt consolidation is a last resort strategy for debt relief and recommended when multiple loans become hard to manage. It lets you roll all your financial obligations into a debt consolidation loan, so you have a single monthly payment, often at a lower interest rate.

Once your finances are stable, you’ll probably wonder if you should focus on paying off your debt or investing.

There’s no one-size-fits-all answer. It depends on your household debt, current interest rates, your goals and comfort level. In many cases, a blended approach is best: repay some, invest some.

Once you’ve taken back control of your finances, whether you required debt consolidation or not, it's time to review your budget and build an emergency fund.  These two key actions will make your life easier and strengthen your financial stability.

Understanding debt goes beyond crunching numbers. It’s also about gaining insight into your habits, making informed decisions and empowering yourself to take meaningful action. Debt may be a part of your financial journey—but it doesn’t have to define it.

With a bit of planning, the right resources and timely choices, you can take control of your debt and turn your financial situation around.