Struggling with debt is never good, but that doesn’t mean that all debt is bad. Borrowing money can allow you to do many things and achieve various goals. It can help you buy a car or a home, or it can spread the cost of various big purchases. But if you want to ensure your debt is “good debt”, you need to know how to identify it. Making the wrong choices about what debt you choose to take on could end in disaster. Before you take out a loan, get a new credit card, or purchase something on credit, there are some things to think about.
Assess Affordability
The number one factor to consider is whether you can afford the debt. If it’s not affordable for you, forget about it. Of course, assessing affordability isn’t always easy. It can require you to take a close look at your finances. Lenders will often give you tools to help make it easier. If you’re looking for a mortgage, many factors affect how much you might be able to borrow. A calculator tool can help make it easier to work out a sensible amount. Responsible lenders will always check that you can afford to repay anything you borrow.
How Does It Benefit You?
Another way to think about debt is to consider your reasons for taking it on. How is it going to benefit you? Ideally, “good debt” will help you improve your situation and your future. It could include financing your new car, which enables you to get to work and generally move around. Or it might be a mortgage, allowing you to eventually own your home outright. Less sensible debt might benefit you short-term, or seem like it will, but might not be such a great idea. It might help you buy something you want, but that you don’t really need.
Building Your Credit History
One of the tricky things about credit is that lenders often want to see that you have some sort of credit history. So staying completely debt-free can actually be to your detriment if you later want to access something like a mortgage or a loan for your education. If you want to demonstrate to lenders that you are capable of handling debt, you might need to consider some “good debt” options. One of these is to have a credit card that you pay in full at the end of each month. You won’t be charged any interest, but you’ll show that you can manage your money.
Debt Management
If you already have debt, borrowing to help you pay it can be a good thing. Debt consolidation can make your debts more manageable, turning them into one easy payment. Before you look for a private debt consolidation loan, try approaching debt management charities. They can help you with a debt management plan that you can afford and that will work for you.
Not all debt is good, but not all debt is bad, either. Before you go into debt, you should look at all the pros and cons to ensure it’s the right choice.