Is Debt Always a Bad Thing?

Americans closed out 2021 with $15.6 trillion in debt. And when it comes to financial anxiety, many say managing debt is one of their top worries. But most people can’t live debt-free. And that’s ok. While swiping your credit card like there’s no tomorrow isn't a great idea, some debt can actually be a powerful tool to help you build a better financial future. When used strategically, that is. 

Wait. How can debt be good?

First and foremost, debt is often a necessity. 

Many people would not be able to go to college or own a home without a loan. These are examples of what experts call good debt. Because they’re more like investments. Student loans can lead to a degree that could help you secure a higher-paying job. And homeownership has long been considered a key to building wealth. 

Bad debt is seen as the opposite.Think: racking up credit card debt on clothes or other things that won’t retain their value. It also usually comes with high interest rates.

Ok, tell me more. How can I use debt strategically?

Every time you borrow money — whether it’s for a major purchase like a home or a splurge with your credit card — have a plan for how you’re going to pay it back first. Debts not repaid in full and on time will generally accrue interest. So ask yourself, is what you’re buying is worth the total cost? Hint: it’s often more than what's on the price tag.

And remember: Credit cards can be used wisely. Rewards cards let you earn points, miles, and cash back, which can mean more swag with every swipe. And balance transfer cards can help you repay high-rate balances faster, which means keeping interest charges down.

Keep in mind that your debts (good and bad) can impact your credit score. Read: On-time payments = a higher credit score. Psst… automating your bills can help.

What if I have too much debt already?

When it comes to good debt, be sure to at least keep up with repayments. And think about whether you should pay it off faster or take your time.

If you're buried in bad debt, the snowball and avalanche methods are two common ways people manage to dig their way out. With the snowball method, you pay off your smallest debt first and work your way up. The avalanche method tackles your debts from the highest interest rate to the lowest. 

Each method has its benefits, but you might have a different approach altogether. The right debt payoff method is the one that works for you.

theSkimm

Debt is a burden. But it can be a necessary tool to achieve your financial goals. And when used responsibly, it can fit neatly into your bigger money picture.