When is it OK to incur debt?
While living debt free is possible, it may not be the smartest way to go. You’ll find that your credit score will suffer if you don’t incur some type of debt.
Good debt is considered an investment that will grow over time. Your house, with a mortgage, is good debt. Student loans, that you can afford to pay back, because you receive your education with it, is good debt. And typically, most people cannot afford to pay cash for a car. You may not think about a car as a good investment, but if it allows you to get to and from work and school, it is an investment.
A home equity line of credit is also considered good debt when used to improve your home. Many people use a home equity loan to consolidate other debts when you can get a low interest rate. But be very careful, your house is collateral. If you stop making your payments, you will lose your house.
That’s pretty much it for “OK to incur debt”.
Suze Orman (Saturday night, CNBC, ch. 37, 8pm) would also add that your car loan should be paid off in 3 years or less! And if you do charge something on a credit card, you should be able to pay off that card in no more than 2 months!
Now – two of the worst types of debt you can have? Payday loans and cash advance loans. Interest rates start at 300% for a payday loan, and if you can’t pay it back by the next payday, it just keeps rolling. Most people really get stuck in a vicious circle of paying more and more for the small amount you borrowed in the first place. But let me ask you this, If you couldn’t afford all your bills this week/month, what makes you think you can afford your bills AND the loan the next week?
Don’t live beyond your means, and you’ll find life much happier than if you are neck deep in debt!