At some point in our lives, we will likely have to accrue debt in order to pay for our children’s education, our home mortgage, or some other costly necessity (unexpected home repairs or medical costs). And that’s OK. In many cases, it’s good to have debt — it can increase your credit score, making you more attractive to creditors, help you build an asset base for retirement, or set you up with a future income. But what is considered to be normal debt? As with sweets and TV, debt is only good in moderation, and most experts say that your monthly debt should not exceed 36 percent of your total monthly income.
Good debt is any investment made into an appreciating asset or into something that is likely to yield a high return. Although not fool proof, investments in education, retirement, or home ownership are all considered good debt — if you can afford to pay it off. These are typically low-risk investments that tend to yield high ROIs. So long as you have the income to continue paying off your debt, you can ride out market fluctuations until it is the right time to capitalize on your investment.
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Also, depending on your credit score, you can negotiate much lower interest rates on consumer loans than you can on a credit card, making it easier to pay off over time.
Remember, the goal is to pay off your debt — not drown in it. It’s only good debt if you have the ability to eventually get rid of it.
Bad debt is anything you bought on credit that is not necessary, like a Caribbean vacation or that trendy designer handbag, or that depreciates in value, like a car. The average credit card debt per indebted household is $15,257, which amounts to $849 billion nationwide, according to CreditCards.com.
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Without a doubt, credit card debt is the big, bad wolf in creditors’ eyes. Interest rates on credit cards are considerably higher than the rates on loans, meaning you will pay more over time, and payment schedules are set to maximize the profit for the creditor. Also, missing or paying late on a credit card payment results in high penalties and can seriously impact your credit score.
While you can rack up rewards points using a credit card that can provide nice perks, it’s best to use credit cards sparingly and to always pay off the balance in full if you can so that you avoid interest. If paying off the full balance each month isn’t possible, at least try to pay off the minimum balance plus a little more so that you decrease your principle balance at a faster rate.
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Many people are left with the tricky decision between paying off debt and investing in their future. If you’re one of these people, consider this: can you currently afford your monthly debt payments or are you having trouble making due? If the latter is the case, focus on reducing your debt and monthly payments until you are in the clear. Accruing more debt — even if it is a method of creating a new income stream — may be in the nail in the coffin. If you feel comfortable with your current level of debt and have no issues making your monthly payments then taking on more debt may be an option for you. Note, your total amount of debt does not matter as much as your ability to make monthly payments.
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