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The pros and cons of debt
Jet, Nov 18, 2002
If every dark cloud has a silver lining, then the same thing can be said for debt.
Debt is something that is very hard to avoid in this day and age. No matter how much money you have you'll more than likely have some debt in your life, so why not make it work for--and not against you? If you learn to use debt as a commodity, then it can be made to work for you if you know how to use it.
Debt can be good or bad, so it can be somewhat of a double-edged sword. The challenge is learning how to judge which debt makes sense and which does not, and then wisely managing the money you do borrow. Avoiding debt isn't always smart because it could mean cleaning out your cash reserves if an emergency arises.
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There is such a thing as good debt, which is debt that can provide an income, like owning land or a vacation home. An example of good debt is borrowing to buy or remodel your home. This adds more equity and allows you to make a tax deduction on the interest you pay. You could also use the refinance money to advance your own career skills by earning a degree, which can lead to better pay.
Also, allowing for your kids to apply for college loans makes far better sense than liquidating or borrowing against your retirement fund or 401(k) plan. That's because your kids have plenty of need-based, government-backed college student loans, like the Stafford or Perkins Loan, to draw on which have guaranteed low rates and no interest payments until after graduation.
Bad debt, on the other hand, includes debt you've taken on for things you don't need and can't afford.
One of the worst forms of debt is credit card debt, because it carries the highest interest rates, according to the U.S. Department of Labor. Let's say you're in the habit of making only the 2 percent minimum payment each month. On a $2,000 balance with a credit card charging 18 percent interest, it would take 30 years to pay off the amount owed. Now imagine how your debts would be if you did this with several credit cards at the same time.
Other examples of bad credit include borrowing money to pay off other loans, creditors calling for payment, paying only the minimum on credit cards, borrowing money to pay regular bills, and being turned down for credit.
If you find yourself in severe debt, a credit counseling service can help you set up a plan to reduce your debts, according to the department.
The ultimate objective concerning debt should be to save enough money--through Social Security, pensions and investments--to enjoy your retirement years.
COPYRIGHT 2002 Johnson Publishing Co.
COPYRIGHT 2008 Gale, Cengage Learning
