Have you ever heard debt being referred to as “good debt” or “bad debt”? The idea that some debt is “good” and other debt is “bad” can be a bit misleading. Debt is simply borrowing money that you plan to pay back. Forget about “good” or “bad.” The question you should be asking before you borrow is “why”?
If you know the answer to the “why” behind your decision to apply for a line of credit or take on a loan, you’re on the right path to understanding how to make credit and debt work for you.
Borrowing with a Purpose
You should always borrow with a clear purpose to improve your overall financial well-being and a clear plan to pay back what you owe. Before using credit or assuming a loan, ask yourself these questions:
- Why am I borrowing this money (or making a purchase using credit)?
- Will this debt improve my overall financial situation?
- How will this debt improve my overall financial situation?
- What is my plan to make this debt work in my favor?
If you are borrowing money to finance continuing education for yourself, your answers might look like this:
I am borrowing this money to invest in my education so that I can increase my earning potential. After completing my education, I will be able to compete for higher-earning jobs that will increase my income so that I can meet all of my financial obligations and save and invest for my retirement.
Establishing and Building Credit
The only way to establish and build credit worthiness is to have and use lines of credit including lending tools like installment loans, credit cards, mortgages, car loans and student loans.
The two most important factors in determining your credit worthiness, or credit score, are your payment history and credit utilization, or the percentage of available credit that you’ve borrowed.
Credit cards can be an extremely powerful tool in your money tool kit. Major credit cards can come with amazing perks including cash back, points, travel miles, and rewards.
When it comes to credit cards, make sure you shop around to find the best credit card programs based on your spending patterns. If you like to travel a lot, look for a card with travel perks. Do you pay off your bill every month in full and want to earn a little cash back? Many cards offer cash back rewards.
And of course, make sure you always use credit responsibly by never carrying a balance that is greater than 30% of your overall line of credit and pay at least the minimum payment on time without fail.
Debt as an Investment
When you make an investment, you’re putting your money to work in hopes of gaining a profit. When you take on a loan, you’re basically paying to borrow money. But did you know that debt and investment can work together? It’s true. Just take a look at a few examples of debt transforming into an investment:
If you buy a house as an investment, your goal is to see that house or property increase in value.
If you assume a student loan, like in our example above, your goal would be to complete your education so that you can increase your income.
If you open a business loan or line of credit, your goal is to transform that loan from a debt into a profitable business.
Monitoring Interest Rates
Make sure you are in the know about interest rates so that you can take advantage of low interest rates for upcoming purchases or refinancing existing debt. When interest rates on mortgages fall, keep an eye out for possible savings by refinancing your mortgage under new or shorter terms.
As you make financial decisions, making credit and debt work for you is an extremely useful skill you can start using today.