Canadians owe $3.25 trillion — and according to Ray Dalio's rule this is mostly bad debt. What you need to know about good debt and bad debt

Dalio first made the point in 2018, but it’s one Canadians should be mindful of in 2026, given that the household credit market debt-to-income has climbed to 179.6%. It’s the sixth consecutive quarterly increase, and much of that borrowing isn’t being used to buy income-generating assets or to pay for themselves.

What Ray Dalio means by good and bad debt

In an interview with CNBC Make It, Dalio divides borrowing into two categories.

1. Good debt either creates forced savings, such as a mortgage, or is expected to earn more than it costs.
2. Bad debt is borrowing for something that doesn’t generate enough value or income to outweigh the cost of carrying it.

As a result, the type of debt becomes more important than other factors, such as the interest rate paid. In fact, on its own, the size of the loan or the interest rate is actually less relevant. For instance, a low-rate HELOC used to fund a rental property down payment can be good debt. A zero-interest promotional credit card balance used to cover groceries because the paycheque ran out can still be bad debt, even at 0%, because it is not building anything.

Pay off debt faster. If you’re struggling with high credit card debt or have outstanding payments on multiple cards, consider taking out a personal loan. If you use a loan consolidator, like Loans Canada, you can shop for the best rate and best loan. Personal loans typically have a lower interest rate than credit cards, which helps you save on interest payments. Plus, you only have one payment to keep track of when consolidating debt with a personal loan. Use Loans Canada to compare rates and find your one payment loan option — and pay off debt faster.

Canadians are carrying record credit balances

As of the first quarter of 2026, Canadians now owe a combined $3.25 billion in household credit market debt, according to Statistics Canada. Meanwhile, our household debt service ratio, or the share of disposable income allocated to debt payments, rose to 14.75%. While dated, research from the Financial Consumer Agency of Canada (FCAC) helps to explain where that borrowing is going. Among homeowners using HELOCs:

• 40% use the money for consumption or home renovations
• 34% use it for financial or non-financial investments
• 26% use it to consolidate existing debt

Home renovations sit in a grey area. A renovation that adds resale value may behave more like an investment. A reno that’s primarily cosmetic leans more toward consumption, no matter how much you enjoy it.

Regardless of current household debt levels, the Bank of Canada’s latest Financial Stability Report notes that households have generally remained resilient, but debt levels remain elevated, and many borrowers continue to face higher mortgage payments as their mortgages renew at today’s interest rates.

How to tell if your own debt is working for you

Apply Dalio’s test to the debt you are carrying. A HELOC used to buy an income property or invest is productive, provided the return covers the interest cost. A mortgage on the home you live in counts as good debt under Dalio’s forced-savings logic, since it builds equity you would otherwise be less likely to save. A student loan that leads to a substantial wage increase can be productive. On the flip side, a personal loan, credit card balance, or HELOC draw to cover a vacation, wedding, or depreciating vehicle is consumer debt, regardless of the interest rate.

Are you in a profession that puts you in the top tax bracket? Then you need to work with fintech and finance companies that know your needs. For instance, eligible professionals can unlock up to $1,313 in annual savings when banking with National Bank. This special offer includes up to 3 bank accounts with no fixed monthly fees, and an eligible Mastercard rewards credit card (certain fees apply). See if your profession qualifies

Where to direct your cash flow once bad debt is cleared

Paying off high-interest consumption debt reduces your interest costs and creates extra monthly cash flow. The next step is to make sure that money doesn’t disappear back into everyday spending.

One option is to redirect your former debt payments into registered accounts. The Tax Free Savings Account (TFSA) contribution limit for 2026 is $7,000. Someone who has been eligible since 2009 and has never contributed would now have $109,000 of cumulative contribution room. Meanwhile, the Registered Retirement Savings Plan (RRSP) contribution limit for 2026 is 18% of earned income, up to a maximum of $33,810.

Whether you prioritize a TFSA or RRSP depends on your income and tax situation. The important thing is to preserve the monthly payment you just freed up, rather than allowing it to become part of your regular spending, as that would defeat the purpose of paying off the debt.