No one really wants to talk about debt and certainly no one wants anyone else to know they have debt. The reality is that most people have debt and that debt is not necessarily a bad thing. In fact, you can use debt as a tool to help you get what you want in life. However, I have found that people will quickly tell me that they don't have any debt at all because in reality they don't want to catch the debt disease. Debt has the stigma of being dirty, bad and associated with people who don't pay their bills. I can tell you that's not really the case. Debt, when used as a tool, can be a good thing, something you live with and something you may even end up liking.
The Good, the Bad & the Ugly
The first step towards being able to embrace debt as a tool is understanding the difference between good and bad debt. Simply put: all debt can become bad debt if it becomes unmanageable. If you're able to make your monthly payment in full and on time and you have positive cash flow, then congratulations, you have good debt. If you're struggling to scrounge up the money each month and constantly find yourself making late payments or robbing Peter to pay Paul, then you have bad debt.
Budgeting Isn't a Dirty Word
Budgeting is key to start making debt work for you instead of against you. Knowing how much money you have coming in and going out each month will tell you what sort expenses you can afford. Let's say you're looking to lease or finance a new car. After taking a look at your monthly expenses, you see that you have enough money left over each month to afford a $200 payment. A loan under $200 then would be good debt because you know you'll be able to manage your payment. On the other hand, anything over $200 will be a stretch and would fall under the 'bad debt' category.
Pick Your Battles
Just like you wouldn't use a screwdriver to hammer in a nail, there are some instances where debt just isn't the right tool for the job. Let's say for this year's Super Bowl you want to get a better look at the game. You head to the store in hopes of picking up a new TV and find one that's just perfect. Problem is, it's way out of your price range. Thinking over your options, you decide that you could pick it up today by charging it to a credit card and paying it off over the next couple of months. You have to ask yourself if this really makes sense to you in the short and long term.
Can you afford the payments? Do you really need the item? What is going to change in the next few months in terms of your finances, meaning will you have more money/bills? Remember, if you wind up purchasing the TV, you don't want to find yourself struggling to pay for it later.
Your Credit Is Married to Your Debt
This is true in sickness and in health. The reality is just about all debt shows up on your credit report. This can help your score or lower it depending on how you've managed your debt. It can help at first but then hurt it or hurt it but then help it. Let's say you have that car loan we talked about earlier and you've been making on-time payments for two years. Then you lose your job and stop paying. Now the same credit account that was helping your credit has flipped and impacted your credit negatively when the lender reports that you have not paid your bill.
You can check your free annual credit reports on AnnualCreditReport.com to make sure your debts are being reported to the major credit bureaus and that they're accurate. Your credit scores are based on this data, so an account that incorrectly shows a late payment can ding your score, turning it from good debt to bad debt. You should dispute any inaccuracies with the bureau. You can also see how your debt is impacting your credit scores for free every month on Credit.com.
Arming yourself with the right knowledge and debt management strategies can help to turn debt from a burden into something beneficial. If you keep what I shared here in mind the next time you consider taking on debt, you'll find yourself making much smarter financial related decisions. So stop living in fear of debt and start seeing it for what it can do for you today.
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