One thing that personal finance writers focus on a lot is debt – and there’s a good reason for that! Debt can make your life very stressful and challenge your ability to achieve your financial dreams. We’ll explain why the following types of debt are the worst type of debt to have:

Credit card debt.
Payday loans.
Vacation debt.

Credit Card Debt

Credit card debt is one of the worst types of have for two reasons:

The interest rates are super high! Depending on your credit card, you may be looking at interest rates of twenty percent or more – which adds up quickly. And since credit cards let you pay the minimum balance each month, they give you the illusion you’ve got your debt under control when you don’t.
A lot of credit card debt is debt that could have been avoided. While you may put essentials such as your groceries on a credit card, you will likely put a lot of unnecessary items on it, like impulse purchases and meals out you couldn’t afford.

Payday Loans

Payday loans can seem very attractive when you’re in a bind, but they charge even higher interest rates than credit cards and can take months to pay off.

Here’s an example of why a payday loan is a bad debt to have:

You go to a payday lender to borrow 500 dollars.
Your payday loan will cost you $17 per $100 that you borrow. This is the same as an annual interest rate of 442%!
You will have to pay interest as long as you owe any money on the loan, which can add up.
You may have to pay additional fees on top of interest if you can’t pay your loan back in the agreed-upon period.

Payday loans are a type of debt you should avoid – even overdraft protection on a bank account or a cash advance on a credit card are cheaper!

Vacation Debt

Now that travel restrictions are easing; you may consider taking a vacation. That’s a great idea if you’ve got the money saved for it!

If, however, you haven’t saved up for a vacation, then taking on debt to pay for one is a bad idea. There are a few reasons for this:

Unlike a car loan or a mortgage, you have nothing tangible as a result of taking on vacation debt.
You’re likely to put your vacation on a credit card, which charges high-interest rates and can take months to pay off.
Any good memories you have of your trip will be soured by the fact you’ll be paying off the cost of it for several months. If you save up before you go, this won’t happen.

What do you think the worst kind of debt to have is?

What are your thoughts on the worst kind of debt to have? Have you ever had a payday loan or vacation debt? Tell me in the comments!

Hello, and welcome to my first post on mortgage terms. There are A LOT of things to consider when you want to get a mortgage, but jargon, unfamiliar terms, and acronyms can overwhelm getting a mortgage! So I’m here today to run through two of the most important terms with you – I’ll cover some more terms next week.

Rate of interest – adjustable (variable) or fixed
Mortgage Term

1. Rate of interest

There are basically two choices regarding mortgage rates – you can select a fixed rate or an adjustable or variable rate.

A fixed rate is exactly what it sounds like – it will stay the same for your entire mortgage term (more on that soon!). So if you are quoted a fixed rate of 3% interest on your mortgage, and your mortgage term is five years, you will never pay anything other than 3% for your entire term. A fixed term has a lot of advantages – you always know how much your mortgage payments will be, and you don’t have to worry if interest rates go up. The main disadvantage is that you could have paid less with a variable-rate mortgage if the variable rate is consistently lower than the fixed rate.

A variable rate mortgage is exactly what it sounds like -the rate of interest you pay will vary. It is quoted as being more or less than the “Prime” rate. The prime rate is a set interest rate that all central Canadian banks use to set interest rates for loans and lines of credit.

If you have a variable-rate mortgage, your mortgage rate will change with the prime lending rate. Your lender will quote your rate as prime plus or minus a specific amount, such as a prime of 0.40%. Even though the prime lending rate may fluctuate, the relationship to prime will stay constant over your term.

For example, the prime rate is 2.5% for six months. And the terms of your mortgage indicate you pay prime – 0.40%. That means your actual interest rate for those six months is 2.1%. If the prime goes up – to 3.0%, you pay 2.6%.

The advantages and disadvantages of a variable mortgage are the exact opposite of a fixed-term one. With a variable mortgage, you don’t know what your mortgage payment will be for the length of your term – so if you’re on a fixed income or a worrier, a variable rate mortgage may not be the best option. The advantage of a variable-rate mortgage is that if the prime rate stays low, you may pay less over the long term than you would with a fixed-rate mortgage.

2. Mortgage term

A second phrase you’ll hear a lot is “mortgage term.” This is the amount of time that you are committed to:

A mortgage rate (as covered above – this is fixed or variable)
A lender – this is likely a bank or credit union
Any conditions set by your lender (e.g. if you are allowed pre-payments – I’ll cover these in my next post!)

In Canada, the most popular mortgage term tends to be five years. After the five years, you can renew your mortgage (unless you’ve paid it off!) with your existing lender or go to a new one (although this can be complicated). The interest rate and conditions you had in the previous term are no longer applicable.

The more you know!

Now you’ve learned what two of the most important terms associated with a mortgage mean:

Rate of interest. This is the amount of interest you’ll pay on your mortgage, and it can be fixed (it will never change) or variable (it can go up and down).
Mortgage Term – this is the amount of time you are committed to a lender. The most common term in Canada is five years.

Come back next week, and I’ll cover more terms! Let me know in the comments if any of this information is new to you!