Can Debt Be Good?

If your goal is to be debt-free, you’re not alone. Excessive debt, like the over $1 trillion Americans now have in credit card debt, can take a big bite out of your monthly budget as you try to repay it. Not to mention the financial stress and anxiety that comes along with having too much debt on your mind.

Taking on debt, when done wisely, is not always bad though. Need to make a big purchase such as investing in a new car or buying your first home? You’ll likely need to take out a loan in those situations and having a good credit history will help ensure you are eligible for more affordable loan rates. This type of thoughtful debt, which helps you achieve your goals of homeownership or having reliable transportation to get to work, can be good.

The key to building and maintaining a good credit history is to use credit, or take on debt, responsibly so that you can repay it on time without stretching your budget or leaving yourself with too little cash to cover your costs of daily living and the occasional unexpected event.

For those just starting out, start small with a low-limit credit card that is secured by your savings account. Pay your balance off in full and on time each month to establish a positive payment history, which contributes to a higher credit score, and limit how much you charge. This will also prevent late fees and penalty interest rates from kicking in, making it harder to catch up on existing bills.

One simple way to stay on track is by only making purchases with your new credit card that you’ve already budgeted for such as gas or groceries. Impulse shopping and overspending can lead to excess debt. So can emergencies, which is why building your savings is also important. An emergency fund can help you handle the unexpected without taking on a bunch of new debt.

Credit scores are used by credit unions and banks to help determine the likelihood that someone will repay a loan. A low credit score, or no credit score if you’ve never had any debt at all, may result in higher interest rates on loans. It may even prevent you from securing the larger items that you and your family need, such as purchasing a new car, buying a home or financing equipment for a small business.

Whether you’re just starting out, need to rebuild your credit or just haven’t thought about it recently, now is a great time to check your credit report and see how you stack up. Federal law allows you to get a free copy of your credit report from all three credit reporting agencies once each year. This can help you correct errors, which could lower your score, and even prevent fraud. Visit www.annualcreditreport.com to request yours today.