Making Good Debt Decisions

Debt is no stranger to most Americans. Credit is becoming easier to obtain and people are charging well beyond their means and at interest rates reaching 20% or more. While "debt" is a scary word that usually is seen in a negative light, not all debt is bad. You can actually make intelligent decisions and use debt as a vehicle for building personal wealth.

Being intelligent with money and making good choices means you need to understand the difference between good debt and bad debt. Consider purchases "bad" that immediately lose their value as soon as you purchase it, or a purchase that has no potential to increase in value. Those are bad debts!

There are many times when it's almost impossible to avoid bad debt completely. For example, if you need a new vehicle, you may need to obtain financing. A car loan is actually considered a bad debt, because once you drive it off the show room floor, it loses some of it's value; and the car will continue to lose value every day that you drive it. If you're unable to pay cash for a car, then you have little other options when it comes time to get another vehicle.

What about credit cards and store credit? Plastic money can be extremely tempting, with promotional offers for low or no interest repayment options and the ability to make smaller payments on a larger purchase when the money is tight. If used widely, many credit cards can actually help people leverage their spending power and their wealth. Unfortunately, most people aren't always able to pay off their credit card balance in full each month, and the resulting interest charges from carrying a balance from one month to the next are often quite staggering.

For people who fall for the store credit promotional offers- the ability to save 10, 15 or even 20% off the current day's order is tempting enough for most people to open a new store credit account. The problem with store credit offers and discounts like these is that if you miss a payment or carry the balance to the following month, often the interest rate is charged at a higher rate than the amount of money you will save on the purchase.

While most people can understand the downfalls of bad debt, many may be confused to learn that there is actually debt that is considered "good". Any debt that is actually an "investment debt" and has the potential to create value is considered a good use of your debt. For example, real estate loans are usually good debts because the land and/or building can increase in value. Student loans are considered good debt because you are investing in the probability of obtaining a higher paid job once you graduate college.

Other debt that is considered a good choice is debts that are tax-deductible and have the potential to generate wealth over the long term. If you use a tax-deductible, home equity loan with a fixed, 6 or 7% interest in order to pay for a high interest credit card, your new debt is a good choice.

Unless you are independently wealthy, it's almost impossible to avoid all types of financing and debt throughout your lifetime. In order to keep it under control however, you should limit the amount of "bad" debts you acquire and try to maximize your debt by financing your purchases with as much "good" debt as possible.

How Do People Get into Debt?

There are two main ways that people find themselves crushed by the weight of their debts. Some people find that debt hit them like a ton of bricks when they lost their job, or experienced a medical issue that resulted in the inability to work or excessive medical expenses. Other people find that debt has sort of "snuck up" on them, over years of casually using credit cards for little purchases that they just didn't have the cash to pay for; or from taking on large purchases like a new vehicle or a home mortgage- only to find that unexpected expenses or changes in income have made it near impossible to keep up with all of the monthly payments.

Regardless of how you got into debt, it's agreed that it's definitely easier to get into debt than it is to get out of it!

Unavoidable Debt

Sometimes, it is completely impossible for an individual to avoid debt. As mentioned above, there are times when you unexpectedly lose your job, and suddenly you have to find a way to pay for all of the expenses you were paying for previously with your full time job on the new, lower, unemployment income (if you qualify). Finding a new job isn't always as easy as applying, and some people go months without a steady income. It's easy to see how these individuals can wind up in over their heads in debt.

Another unavoidable situation that results in large amounts of debt can be when you or a family member is injured or becomes ill. If your health insurance isn't adequate to cover your medical expenses, you can quickly be overcome by excessive medical bills and not have enough left over to pay for your regular monthly expenses. This scenario also has a tendency to result in a "double whammy" because if your medical issue results in your inability to work, and your inability to work causes you problems paying for your medical expenses and other obligations- debt is going to take over.

Avoidable Debt

For every person who has unavoidable debts, there are probably 10 who are in over their heads in debt that could have been avoided. These are people who have relied on credit cards to stretch their income a little further- and then over time, and with the help of excessive credit card interest rates and late fee charges, found that they were suddenly having difficulty keeping up with all of their expenses. Many people use credit when they don't have the cash available to buy something they want, and don't take the time to consider how long it will take to pay off that impulse purchase. It's usually not until it's too late before people realize just how far they've gone into debt by using credit cards to make purchases and then not paying them off the moment the statement arrives.

Retail therapy is a common reason for people to find themselves overwhelmed with debt. People who are unhappy about something and make themselves feel better by shopping. Often, people who don't have as much money as they would like later find themselves at the mall, armed with a few good credit cards to forget the troubles- or find themselves taking a few days vacation, always with the intention of paying the bills off right away.

Whether you are in debt because of unavoidable situations or avoidable circumstances, debt is debt, and it is much harder going off than it was going on- just like weight loss!