Life today involves credit; there is no way to avoid it.It exists everywhere from the student to government.It is safe to say that the world revolves on credit.Credit at high levels does impact the consumer as anyone with a variable rate mortgage knows.When things get overheated in an economy, interest rates increase and are allowed to fall as the economy cools.There are arguments on both sides of the fence for this practice.One camp says increasing rates are inflationary in their own right and do not address the real problems and the other side of the fence claims that increasing rates withdraws credit from the business sector forcing it to act responsibly.Both sides have merit and in either event, the consumer is affected.
While loans rates are important to the consumer, of more importance is where that debt is being applied.Good debt is incurred when any purchase is made that is beyond that of liquid funds of the buyer and applied to goods that will appreciate in value.This is good debt.It is certainly tangible and over time can be sold for cash that if the borrower was shrewd, will provide an excess over the cost of the loan.
Consider that a house cost $100,000 at the time of purchase and the value of it increased to $250,000 within a period of time, a net profit will be realized.Not necessarily.If the cost of borrowing that money cost $150,000 then there is a net zero of improved financial position.So, the idea is to reduce the cost of borrowing so the loan is not only paid off sooner but with less cost of borrowing.However, if the homeowner is looking at the investment only as a golden years stability, then the cost becomes secondary; or does it?Paying off that mortgage then frees up cash for retirement savings, another gain in financial well being.
Student loans are another form of good debt.They are an investment in future employment.Again, just as with the home, paying them off as quickly as possible should be the aim.When entering the workforce, wages are typically at their lowest.This is the time to tackle that student debt.Forget the self reward of a new car for graduating, it will depreciate, not appreciate in value.Your education will open doors to increased wages.The car will not.It is not uncommon for people to be paying off student debt one or two decades after the fact because they ignored the most basic rule of finance; control and eliminate debt as quickly as possible.
Credit cards are generally considered bad debt because of the extraordinarily high interest rates and the open ended pay down.Credit cards are the most easily abused form of debt because of their availability and the willingness of retailers to issue a new one that is tailored just to their business.Read the fine print.Credit cards can accumulate like snowflakes, and the consumer can quickly get buried in high interest debt.
Another type of debt that can be considered both good and bad is consolidation debt.First, the way to consolidate debt is not to move it from a high rate to a low rate such as paying off credit cards by adding to your mortgage.All you will do is increase the life of the mortgage and spread the cost of that loan over a longer period of time.This is poor financial practice unless there is no alternative.
Good debt consolidation involves going to a debt counsellor.Put it all on the table, credit cards, student loans, mortgages, everything.The consolidation manager will contact the companies and advise them you are seeking consolidation.In many instances, s/he will be able to stop all interest with the exception of a mortgage.Then a loan will be made and a strict budget that the borrower(s) must follow including no use of credit until consolidation is complete.This form of good credit shows lenders that the borrower can be responsible and meet their obligations.Of course attempting to self consolidate does not stop interest nor does it provide a solid budget to work with.The obligations are still there and the borrower has only shifted all debt into a single location.
When eliminating debt it is always best to get rid of the debt with the highest interest rates first then move to the next highest and so on.Usually this means an outright attack on credit card balances.The trick is to lock them away and break the dependence on them.As this debt is retired, an increase of money available is now able to be applied toward the next debt.As each is put away eventually the money available is suddenly realized.This money is what would have been going to bad debt or credit.Now it is time to apply it to your good debt.
Just don’t forget to pay yourself at the same time.This doesn’t mean go out for a night of dining and dancing but it does mean put a percentage of that available income into long term savings where it will grow through compounding.
Suddenly, the golden years can be platinum.It just takes commitment and purpose in the form of goals.Financial security can be yours.The earlier you start, the earlier you can enjoy it.