The majority of Americans carry debt – be it through student loans, credit cards, auto loans or a mortgage. According to statistics from the United States Federal Reserve the average household owes around $7,500 in credit card debt alone.
Debt is a complex issue, and many of us could not afford to make major purchases without taking on some amount of debt. However, knowing how to smartly spend your money and when to take on debt is imperative to keeping your financial comfort.
So how do you know the difference between good and bad when it comes to your debt? It boils down to a question of wants and needs, but there are many alternative strategies for debt management out there. Here are just some personal money management tips that can help you become a smart spender.
Good debt creates value. Think about your home or your education – when you take out a loan to purchase your home, it will most likely increase in value over time. Likewise, a student loan has the potential to produce more wealth in your life, as it increases your earning ability. Your mortgage benefits you when it comes to tax time, allowing you to deduct the interest you pay over the year. Good debt should be thought of as an investment for your future – a purchase that increases in or creates value over time.
In contrast, bad debt is accumulated whenever you owe on goods or services that offer no lasting value. While these non-essential items are tempting, not being careful with your money can easily steer you towards crippling debt as high-interest rates begin to add up over time. If you do take on bad debt, make an effort to make more than the minimum payment each month to pay off the amount owed as soon as possible.
Complexities of Debt
As we mentioned earlier, debt often comes down to wants versus needs. For example, while most economists consider an auto loan a form of bad debt, the issue becomes more complicated when having a car means getting to that high paying job each day or not. Then there is the issue of establishing a solid credit history. Whenever you’re applying for a loan creditors will want to see a proven track record of consistent, timely payments to solidify your standing as a responsible borrower and a low credit risk.
Understanding the Risks of Debt
Whenever considering a loan, pay close attention to the terms and conditions associated with borrowing the money. Ask yourself if you’ve carefully considered the risks of not being able to repay the loan amount in a timely matter. When it comes to debt, it’s not always the amount borrowed, but the interest rate applied that really determines how much your finances are affected.
You should always have a plan to pay back your debt to keep it from spiraling out of control. Many consumers have good intention to pay their bills in full each month, but then something happens that leads to partial, late or even missed payments that quickly leave borrowers in over their heads.
Getting Out of Debt
If you want to get your finances under control, having a plan to prevent and repay your debts is key. Making sound financial decisions can help you minimize your debt and keep you from living paycheck to paycheck. Use financial literacy tools, online repayment calculators and household budgeting systems to help you steer clear of the stresses debt can cause.
Start on your road to better money management by setting up an appointment with your trusted community credit union, CHROME. Our representatives actually care about your finances, aiming to provide you with all the tools and resources you need to make smart banking decisions as you save through the years. For easy access to your money when you need it most, turn a credit union that cares and open an account at CHROME today.