Making smart choices about debt The choices we make about debt can either hurt us or help us. Not all debts are created equal. There's are debts that allow you to grow, generate income or create a good payment history. Then there are the debts that get out of control and drain your finances. Creditors always look at your debt very carefully when evaluating you as a candidate for any type of loan. The amount of "good" debt or "bad" debt in your credit report helps them decide if your loan is rejected or approved. It also helps determine how high your interest rate and payments will be. Take a closer look at your debt: The good, the bad, and the ugly... The Good debt: Generally, taking on debt for something that grows in value is good. Here are a few examples: A student loan or school loan you can afford earning a college degree usually means you'll make more money over your lifetime, which can help make up for the cost of your investment A mortgage historically, homes appreciate in value over the long term A business loan the income generated by a successful company can help make up for the initial cost of getting the business up and running
Bad debt: As a general rule, if a purchase won't go up in value or generate income, you shouldn't go into debt to buy it.Here are a few examples: Credit card balances that get too big to pay off including store credit cards To help establish credit and build your credit rating, make a purchase with your credit card only if you can pay it off in full on the next statement. Auto loans you have to stretch to afford Add the interest you expect to pay over the term of the loan to the sticker price to see how much you'll actually be paying. Use the total to decide if you should take on that debt, or finance a more economical car. Vacation once the good time is over, you could be paying for it, plus interest, for months or even years. Plan ahead, and open a vacation savings account. Every month, have your bank automatically transfer $25, $50 or any amount that's manageable into the account so you don't have to finance your getaway. Recreational goods, like a big screen TV When a store offers you 10% or 20% off your purchase to open a card that day, remember this: If you don't pay off your card amount before the payment is due, your interest rate could increase and end up costing you more than the discount you received!
The good and bad debts you take on affects your overall credit rating, and your ability to afford or be approved for all kinds of loans.