. Some people in the financial advice industry believe that getting into debt could lead to the most serious of problems. Yes, there are some types of debt that can keep you in an endless cycle of paying money over years.
There are occasions when taking on debt can be beneficial to your financial situation. Although debt isn’t necessarily bad, there is always the risk that you will get in over your head. You can simply use it to make large purchases without draining your savings.
” I think it is so important that people don’t be afraid to take on debt. Instead, they should look at it as a tool to their advantage,” Kara Duckworth (Mercer Advisors certified financial planner, managing director of client experiences), says.
Here’s a list of situations where borrowing money could be a great option.
For Something that May Increase in Value
Debt can be classified as either good or poor, depending on why you borrowed money and the amount you pay in interest.
“Good credit can make it easier to move ahead in your life and career,” Mark Reyes is a senior financial manager at Albert and a certified financial planner. Bad debt, on the other hand can prevent you from reaching your goals .”
Mortgages is often cited as an example for good debt because a house can increase in value. Bill Hampton is a financial educator and the CEO of Hampton Tax and Financial Services, Atlanta. “That’s no bad debt. It’s going to provide a roof over my head.” Financial risk can be caused by borrowing too much or failing to understand the terms.
Student Loans are another example of good debt. Your education will help you increase your earning potential over the long-term. Hampton says that although you will be in debt for many years it can help you get a better-paying job. However, if you major isn’t supportive of your debt it may hold you back .”
To Finance a Major Purchase
Now for bad debt: credit cards. These cards not only charge high interest rates but also allow you to continue making purchases even though you owe money in the past. You can easily end up with an unpaid balance that continues to grow, regardless of how hard you work to reduce it.
Some credit cards have no-interest promotional offers that you can apply for large purchases. You can spread the cost of a large purchase over several months. These are often longer depending on which card you have. Be sure to set aside enough money for the promotion so that you can pay off your purchase within the timeframe.
If you are in debt, you can use balance transfer cards to pay off your debt and get no interest for a few months. As with all cards, you should read the conditions. You will likely have to pay a fee for the transfer and your interest rate may rise once you end the promotion.
If you have a house, borrowing against it in the form a loan for equity or a line of credit (or HELOC) can free cash to pay for renovations. This can be an alternative to borrowing against the home’s value with a credit card that charges a higher rate of interest.
” Depending on the equity of a person and their particular situation, it may be more beneficial to tap into this than a personal loan or credit card.” Reyes states. It’s the lesser of two evils .”
To Avoid Unexpected Weather Costs
You’ve already heard it. It is essential to save for emergencies. You need to have emergency savings.
These are times when it is possible to take on debt in order to make the right decision. Personal loans and HELOCs may offer lower interest options to help you cover an immediate need, while credit cards are a good backup option.
If you find yourself in debt due to an unexpected expense, Hampton suggests creating a plan that will allow you to repay the balance over several paychecks. Other options to reduce the cost of debt include moving it to a balance transfer or negotiating with your credit card company.
“Remember to call your credit card company in order to get a lower interest rate than what you are being charged.” Reyes said. It’s unlikely that it will work every time, and it is not easy .”
By Sara Rathner of NerdWallet
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