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Good Debt vs Bad Debt

Good debt vs bad debt

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Debt. The word often conjures up images of a ball and chain that weighs us down. But debt doesn’t have to be as scary as it sounds, as long as you are thoughtful about spending and smart about borrowing. Here a 3 things to consider when you borrow money:

  • Long-term vs short term

    When done correctly and for the right reasons, borrowing can help improve your life and achieve your financial goals. For example, most of us don’t have enough cash set aside to pay for a car or a home. Borrowing helps you finance the car that you need to get to work, earn a paycheck, and advance your career.

    You can also get a home loan (a mortgage) to buy a house. Even though the mortgage can be significant, especially in California, your home will increase your net worth over time, as property values tend to rise. In this case, not only does borrowing provide shelter for your family, it can grow your personal wealth over the long-term.

    Credit card debt should be approached as short-term debt. A credit card can help making purchases easier, as it’s a safe and secure form of payment and you won’t have to carry cash. You should try to pay off your credit card bill in full monthly, or make sizable, regular payments to avoid paying high interest.

    If you need to use a credit card to finance a large purchase, like a dishwasher, plane ticket or new furniture, it’s important to have a plan. Make sure you are using a low rate credit card, and pay enough each month towards reducing the principal. Financing short-term happiness, such as a dream vacation you can’t really afford, may not be a wise move as it could set you back financially and make it harder to reach your other goals.

  • Can you afford it?

    Sure, a lender must qualify you for any type of loan. But before taking out that loan, you also need to ensure that you can afford it – not just that you qualify for it. Are you comfortable with the monthly house payment – plus the increased utility and insurance bills? Are you willing to give up eating out for a while to pay for a remodeling project? Is it worth putting so much of your monthly income towards the high monthly payments of a new car, or can you keep driving your old one for now?

    Here’s another example. We may value a good education for our children, but if $45,000 tuition at a prestigious school is going to create financial distress, consider alternatives like more affordable local college. It’s important to be honest with yourself and not live beyond your means.

  • Make your payments on time

    Most of us carry debt of some form. According to a 2015 survey by NerdWallet, the average U.S household that has debt owes $130,922 — including credit cards, mortgages, auto loans, student loans, and other debt. The first key to managing debt is making payments on time. Timely payments will improve your credit, and good credit can help lower your borrowing cost. Check out our video on the benefits of on-time payments!

    Some of us also don’t have perfect credit, but that doesn’t mean we can’t also benefit from making timely payments and being debt smart. Patelco offers the Timely Repayment Incentive Program (TRIP) on personal and vehicle loans, which provides rate reductions for timely payments — helping you save money on your loan.

    At Patelco, we’re here for your whole financial journey – whether that’s offering you access to TRIP, providing exceptional rates, or giving you the tools for day-to-day-budgeting. Count on us for expertise along the way – and keep coming back to Financial Sense.