Your debt: The good, the bad and the ugly

Don't be shy, we know you have debt. Statistics Canada recently revised its numbers on Canadians' debt levels, revealing that many of us are even deeper in debt than previously thought, owing, on average, $1.63 for every dollar we earn. Yikes!

But before we go all Suze Orman on you about how bad you've been, we'd like to make one thing clear: while it's best to owe nothing at all, not all debt is entirely bad — and sometimes some debt is just plain necessary. Other types of debt, on the other hand, are nothing short of ugly in terms of the effects they can have on your financial future. So how can you tell the difference? Here we'll take a look at debt: the good, the bad and the ugly.

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The good

When you're staring down the prospect of taking on new debt, there's one kind that stands out from the rest: the kind that helps you to land a bigger bounty. This might be a mortgage to help you stake your claim to your very own piece of land, a business loan that helps you spur your own enterprise, or even a student loan to give you a head start up the income ladder.

But not so fast! While these types of debt can be of benefit, they still need to be approached with caution. A mortgage is only a smart move if you can kick it off with a solid down payment and avoid extending your credit to the max. And while starting your own business can be a profitable move, entrepreneurship is risky, so it's smart to have some start-up cash of your own — or at least an escape plan in case the going gets rough. As for student loans, know that according to the Canadian Federation of Students, the average student graduates with almost $27,000 in debt — a sum that takes most students nearly 10 years to pay off.

[More: Are you in credit card denial?  Find out if your debt is above or below average]

Okay, so we haven't made this debt sound all that good, but it's all about how you use it. The key is to borrow a little, but think about it a lot. While these types of debt have the potential to help you ride off toward financial security, one wrong move can still put your finances in peril.

The bad

The debt that falls into this category includes car loans, home equity loans and lines of credit. This kind of debt is tricky. It can seem like a good idea, an investment even. In reality, it's often a financial trap (easy enough to get into, much harder to get out of). It also represents a fine line you don't want to get into the habit of walking; that is, the one between living within your means and spending money you just don't have.

For example, while a mortgage is generally a "good" type of debt, using that mortgage as a piggy bank is like finding yourself in a hole, grabbing a shovel and digging yourself in deeper. If you have a substantial amount of equity in your home and a low, fixed mortgage rate, using home equity to pay off higher interest debts may be a reasonable solution. If you're using it to keep up with the Joneses, beware: you're playing with fire.

[More: Tips for paying off your student debt ]

The same goes for car loans. While many of us need a car to get to work and around town, big car loans are bad news. In fact, buying a car is only an investment in the sense that you're putting your money into reliable transportation that'll take you to and from your destination. But watch out: once you take off in that hot new ride, it's already lost a ton of its value. That makes a car a bad investment in every other sense of the word.

In short, if you can fork over the cash to pay for a car outright, do it. Otherwise, look for a reasonably priced used car and keep the loan as small as possible.

The ugly

This type of debt is so sinister that it's best to lay low rather than mess with it; think payday loans, overdraft protection and, yes, credit cards. These debts' interest rates and emphasis on convenience can put borrowers in a downward cycle. But what's worse is what these types of debt represent: that you're spending more than you make on a regular basis.  By allowing you to afford a lifestyle that's out of your reach, ugly debts are like a clever disguise. But you can't hide forever; if those debts get big enough, you'll have to come clean — and pay them off. According to statistics from Human Resources and Skills Development Canada, 91 percent of those who file for personal bankruptcy report having credit card debt. If you aren't working to leave ugly debt like this in the dust, that's exactly what you'll be eating for years.

[More: Car payments 101: What to do when the car you bought costs too much]

Debt: It ain't pretty

Not all borrowing is entirely bad, but it's best to approach any debt with caution, especially since most Canadians are (literally) consumed with it already. Some debt can be good, but take on too much of any kind - good, bad or ugly - and the results will be anything but pretty.

GoldenGirlFinance.ca is a free personal finance and education site for women.

Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial or legal strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances, as well as fully aware of current laws and regulations.

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