I am Liam. We just spent two videos learning how compound interest can make you rich, but I have a serious warning for you: the same math that builds wealth can also make you poor very quickly. Today, we are talking about the reality of personal debt in Canada. Whether it’s a credit card for a new pair of shoes or a loan for your first car, debt uses the exact same exponential formula we just learned—but it works against you. We want to make sure you understand the short-term and long-term costs of borrowing money so you can stay in control of your financial future. Let’s look at the numbers behind the debt trap.I am Maya. One of the most common mistakes young people make is not understanding how credit cards really work. I will explain why missing a single payment or even just making a “late” payment is one of the most expensive mistakes you can ever make. We will use technology and spreadsheets to look at the effects of delayed payments on a credit card balance. It’s not just about the interest—it’s about the fees, the penalties, and the way the bank calculates your balance. By the end of this section, you will see exactly why “buy now, pay later” can be a very dangerous slogan if you aren’t prepared.I am Chloe. It is important to remember that not all debt is “bad.” Sometimes, borrowing money is a smart investment in your future. I will explain the costs and benefits of “Good Debt,” like student loans or a mortgage for a home. These types of debt often have much lower interest rates and can actually help you grow your wealth over time by allowing you to get an education or own a valuable asset. The trick is knowing how to distinguish between an investment and a trap. We’ll look at the specific economic data to see which debts are worth the cost and which ones you should avoid at all costs.And I am Noah. We also need to talk about the most dangerous forms of debt out there, like payday loans. These are short-term loans that target people who need cash fast, but the interest rates can reach four hundred percent! That is not a typo—four hundred percent! We will look at current Canadian regulations and show you how to protect yourself. Knowing your rights and the regulations around credit can save you from a lifetime of financial stress. We want to give you the motivation to stay debt-free so that every dollar you earn belongs to you, not the bank. Let’s dive into the reality of debt.When you borrow money, you are essentially buying someone else’s cash today with your future income. The price you pay for that cash is called interest. In Canada, interest rates vary wildly depending on what you are buying. If you are buying a house, a mortgage might have an interest rate of six percent because the house itself is “collateral”—the bank can take the house if you don’t pay. But a credit card is “unsecured,” meaning there is no collateral. Because the bank is taking a bigger risk, they charge a much higher interest rate—often twenty percent or more! This means for every hundred dollars you spend and don’t pay back, you owe twenty dollars in interest every year. The con of high-interest debt is that it can eat up your future savings before you even earn them.Let’s look at what happens if you have a one thousand dollar balance on a credit card. If you miss a payment or pay it late, three things happen. First, you get hit with a late fee, usually around thirty-five dollars. Second, your interest rate might jump from twenty percent to twenty-five percent as a penalty. But the third thing is the worst: compound interest. If you only pay the “minimum amount” each month, you are barely covering the interest. This means your principal stays the same, and the bank keeps charging you interest on that same thousand dollars month after month. Using a spreadsheet, we can see that a one thousand dollar debt could take over twenty years to pay off if you only make minimum payments. The tip here is simple: always pay your credit card in full every month to avoid these massive costs.However, we should distinguish this from “Good Debt.” A student loan through O-S-A-P, for example, is an investment in your “human capital.” It allows you to get an education that will hopefully lead to a much higher salary. Because the government wants you to succeed, student loans often have very low interest rates and a “grace period” where you don’t have to pay until you graduate. Similarly, a mortgage allows you to stop paying rent and start owning a home that will likely increase in value. The pros of these debts are that they help you build a credit rating. A good credit rating is like a grade for your financial life. If you have a high grade, future lenders will give you even lower interest rates, saving you thousands of dollars in the long run.But you must stay away from the “Payday Loan” trap. These are small loans meant to last until your next paycheck, but they are incredibly expensive. In Ontario, the law says they can only charge a certain amount, but when you calculate the annual rate, it is still hundreds of percent higher than a credit card. These loans are designed to keep you in a cycle of debt. As a consumer, you are protected by Canadian regulations that require lenders to be transparent about their costs. For example, credit card companies must tell you on your statement exactly how long it will take to pay off your balance if you only pay the minimum. Reading these disclosures is your best defense. Motivation to stay debt-free comes from the freedom of knowing your money is yours. In our next video, we will look at how your paycheque is calculated so you can plan for these expenses before they happen.
