When we think of debt we think of those dreaded monthly payments and problems with collections. After all, it isn’t often you hear someone speak nicely about debt. The truth is that there is actually a lot of good to be gained from some debt.
One of the major reasons you need some debt is to improve your credit. Without ever borrowing you won’t have much of a credit history, which essentially makes you a risk in the eyes of lenders. In order to establish a credit history and mark yourself as a responsible borrower you need some debt. However, there is a fine line between good debt and bad debt. When it comes to keeping your debt in the “good” category there are a few rules.
First, don’t carry a high balance. More specifically, keep your balances below 30% of the available limit on the account. So if you have a $5,000 limit on a credit card your debt balance should not exceed $1,500. The more manageable your balance the better off your credit score will be.
Second, don’t carry too many balances at once. The old saying “don’t close a paid off card” is correct, having a few lines of credit open and without a balance is a great way to boost your credit score. The reason is your total available credit will be much higher when you have accounts that carry a zero balance.
Last, consider the type of debt you carry carefully. If you are just starting out in the credit game or have recently had debts resolved through an Arizona bankruptcy, secured debts are not likely the best choice. Take the time to use unsecured lines of credit for establishing your debt payment history before jumping into a secured line that comes with more strict payment terms.
Another reason some debt is good is that it teaches us financial discipline. Smart money managers know how to plan for their monthly expenses and payments, taking the time to consider debt payments as well. From student loans and mortgages to medical debt or credit cards, all of these categories must take an active place in your budget if you are to learn to manage your money wisely.
The same is true for children and young adults. Allow your kids to experience the purchase equals debt and payment equals credit game so they have knowledge of how the process works. Too often young adults head off to college without this experience and get in over their heads with too much credit debt. Start them early so they can learn the basics of budgeting and wise credit use.