Money Talk Monday: Smart debt pays off

By Debra Avara


Is there such a thing as “smart debt”? Is it really better to buy the big stuff on credit than to pay cash? If not, how do you build your credit without getting into massive debt?

Yes, there is such a thing as smart debt. Most financial advisors say that smart debt is anything that can help you financially. Student loans are considered smart debt (assuming you only take what you need) because it furthers your education, resulting in more opportunities in your career. Mortgages, assuming you get the right loan, help you build equity in your home. Even a car loan, if you put down a substantial down payment and pay it off in just three years, can be smart debt.

Yes, it is better to buy the big stuff with a credit card verses cash. First, you have the risk of loosing your money or being robbed if you are carrying a large amount of cash on the way to a store. If it is stolen, it’s gone. If someone steals your credit card, companies offer protection against fraud. Credit cards also offer some type of protection if you buy a product that is defective. It is easier to stop payment with your credit cards than it is when you pay cash.

However, Suze Orman, (one of my fav financial experts- Saturday nights, 8 p.m., CNBC) says you should not buy anything on credit cards that you cannot pay off monthly or in two months’ time. There is a huge myth that you should carry a balance on your credit card every month and it builds your credit faster. Not true. You can and should pay off your credit card monthly and it builds your credit score just fine, without you giving them extra money for the interest!

Now, how do you build your credit without going into massive debt? First, if your parents have good credit, and you are responsible, they can add your name to their cards, and their credit becomes your credit. The next easiest way, if you have a savings account, say $500, ask the bank/credit union for a secured credit card against your savings. They will give it to you because they have nothing to lose. You will not be able to take that savings out, as they are holding it as a guarantee you will pay. Take your card, buy something small you need, $10 or so, when your bill arrives, pay it off. Next month, do the same thing. The next month, do the same thing. This is building your credit! Having a card secured or unsecured is irrelevant to your credit score. In a year or so, call your credit card company, ask for an increase in your credit line, probably now unsecured. Your credit score will rise with the increase in available credit to you. Just make sure you pay your small bill every month, ahead of schedule!!

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