3 times debt can be a helpful tool |
In some corners of the world of personal financial advice, getting into debt is about the worst thing you can do. And yes, some forms of debt — especially those with high interest rates — can keep you stuck in a money-debt cycle for years.
Still, there are times when taking on debt serves a purpose in your overall financial picture. Debt isn’t always bad, but there’s always a risk that it can get overwhelming. It’s simply a tool that allows you to afford a very large purchase without using up your savings.
“I think it’s so important that people don’t fear debt, but instead look at it as something you can use to your advantage,” says Kara Duckworth, board-certified financial planner and managing director of client experience at Mercer Advisors.
Here are a few examples of when the ability to borrow money can come in handy.
For something that may increase in value
Debt is often categorized as good or baddepending on why you are borrowing money and how much you are paying in interest.
“Good debt can help you advance your career and your life,” says Mark Reyes, certified financial planner and senior financial assistance manager at financial services app Albert. “On the other hand, bad debts can prevent you from achieving your goals.”
Mortgages are often cited as an example of good debt because a home can appreciate in value. “It’s not an irrecoverable debt; it will put a roof over your head,” says Bill Hampton, a board-certified financial education instructor and CEO of Hampton Tax and Financial Services in Atlanta. Of course, borrow more than you can afford or don’t understand terms of the loan can pose a financial risk.
Student loans are another well-recognized example of good debt, as your education can increase your lifetime earning potential. According to Hampton, “You’re going to be in debt for a few years, but you’re going to get a better-paying job. But if your major doesn’t support your debt, it could hold you back.”
To finance a major purchase
Now to the bad debts: credit cards. Not only do they charge high interest rates, but you can continue shopping even if you still owe money from the previous months. It’s easy to end up with a balance that keeps growing no matter how hard you try to destroy it.
However some credit cards Offer interest-free promotions that you can use towards a large purchase. These promotions allow you to spread the cost over many months, often 12 months or more depending on the card. However, make sure your budget allows you to cash it out during the promotion period – before the interest kicks in.
If you have existing debt, balance transfer cards allow you to shift that debt and not pay interest for months. But as always, make sure you understand the terms of the card you’re using – you’ll likely pay a fee for the transfer, and the rate will go back up once the promotion ends.
Once you own a home, you borrow against its value in the form of a home equity loan or home equity line of credit — or HELOC — can free up money for home renovations. Homeowners can choose to do this rather than put the cost of renovations on a credit card that charges a higher interest rate.
“Depending on how much equity a person has and their specific situation, it might be better to use it than a credit card or a personal loan,” says Reyes. “It’s sort of the lesser of two evils.”
To survive unexpected expenses
You’ve heard the lecture before. You must have emergency savings. But that’s the thing about emergencies – they happen randomly and sometimes simultaneously, regardless of whether you’ve saved money or not.
These are the moments when you may need to make the best, less-than-optimal decision, and that can mean running into debt. HELOCs and personal loans can be a lower-interest way to borrow money to cover an emergency situation, but credit cards can also serve as a backup source of emergency funding.
If an emergency expense puts you in credit card debt, Hampton recommends making a plan to pay off that balance with a few paychecks. You can also take other steps to reduce the cost of your debt, such as: B. move the debt to a balance transfer card or see if your credit card company is accommodating you.
“Consider calling your credit card company and try to negotiate a lower interest rate,” says Reyes. “It’s not always successful and it’s not likely, but it’s worth trying.”
This article was written by NerdWallet and originally published by The Associated Press.
The article 3 times debt can be a helpful tool originally appeared on NerdWallet.