Tuesday, March 1, 2016

The Difference Between Good and Bad Debt

Today’s students pay a premium to go to college. It’s more expensive than ever to pay tuition, textbooks are borderline extortion, and after inflation the minimum wage is about 30% less than it was a few decades ago. So working all summer to pay for school has turned into working as many hours as you can to support yourself while taking out a staggering amount of loans. We all know it; the headlines are everywhere.

It’s no surprise that more college students are shying away from financial risks. Today’s twenty-somethings are less entrepreneurial than their parents, less interested in owning a home and even less willing to take on a car loan. It’s been drilled into your head that debt is bad, often with family horror stories about how much debt your parents had to overcome, or maybe never did. Unfortunately, those same lessons that were meant to teach you frugality have instilled some bad habits and perhaps some unnecessary fears.

There are really two kinds of debt. Bad debt is money you owe and have no chance to repay. Credit card debt can stay with you for a long time, particularly with the high interest rates young people have to endure. You can end up paying off that mall shopping spree long after the clothes you bought have made their way to the local charity shop.

Good debt, on the other hand, represents a risk you’ve taken, and may yield a financial reward. Opening a business involves taking on a loan, but in exchange, you have the chance to build a constant source of cash for your life. You need a loan to buy a house, but you can always sell the house, often making a tidy profit. Even your student loans represent a risk. You’re taking on the loans now in the hopes that your lifetime earning potential will increase enough to offset the cost of your education and secure employment in a career that pays more than you would have otherwise earned.

At some point, you’re going to want that good debt. You’ll want to stop renting, or own your own business, or go back to school to get ahead at work. The only way to get enough cash for those options is to take out a loan. When the time comes, you’re going to need a good credit history. So, let’s turn that bad debt into good debt. Get a credit card from someone you trust, and use it for your monthly expenses, such as groceries and gas. Then, pay it off in full every month. If you have outstanding credit card debt, roll it into a lower-interest rate loan. Start with the highest interest rate and work your way down.

If you would like a free review of your credit score call us at (877) 937-2328 or stop by your local Community Financial branch. You can also learn more about how your credit score is calculated by visiting cfcu.org/Review. If you’re already on top of your bad debt, give us a call to find out about good debt. You can find out what it will take to own a home or start a business, and then start the process of getting everything in line. The younger you are when you start, the easier it can be to get everything working for you.

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