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When Is Debt Good?

Submitted by Martin Martinez | RSS Feed | Add Comment | Bookmark Me! print

Is there ever a time when being in debt is good? The answer to that question is yes. However, it is important to remember that being debt is not the same as being "crushed" by debt. There is a difference and knowing one from the other is important.

The reason we have debt is simple: We want to have something now but we want to pay for it later. Debt is the vehicle that makes that happen. Most consumers would be hard pressed if they had to pay for a home in cash, in full. The same is true if we had to pay upfront for our new automobiles or any other big ticket item. By using debt responsibly, we can have those items now without having to save for years and years.

In a perfect world, we would all have enough money to pay cash for the things we need and want, but the world is not perfect and without debt and credit, we could not sustain a high standard of living. However, the key to using debt is to use it carefully, which is where a lot of consumers run into trouble.

Debt is good when it is used for the essentials. The less essential an item is to your life the less you should consider using credit to get it. The reason for this is simple: debt and credit are not free. Even small items, when charged to a credit card, for example, can become incredibly expensive as interest is tacked onto them. As more and more of these items pile up through the use of the same card or other cards, the payments can become overwhelming.

The best way to use debt and credit is through discipline. Most consumers can take on some debt and as they pay off those loans, on time, and in full, will be allowed a higher level of credit later on. It takes time to build a solid credit history which can lead to a higher credit score, and it is during this building up phase that consumers should not take on more debt than they can handle. Many consumers are surprised at just how fast their credit score can fall once they encounter some financial problems which cause late payments or no payments to ensue.

In summary, debt is good when it is used for the essentials. Debt is good when it is limited and controlled. A way to monitor this is set a percentage of your income as debt related. In other words, if you feel that 30% of your income can be devoted to repayments of loans, then stick to that level of debt and do not exceed it. Debt is good when you make it a habit to pay off loans, on time and in full. The repayment of even small loans will good on your credit history and those repayments also free up additional cash. The money that you were using to pay the loan each month is now money in your wallet.

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