As a result of the financial crisis, debt has become a dirty word. It’s easy to understand how debt has gotten its bad rep, given all the frightening news stories we’ve seen: homeowners owing more than their home is worth, people crushed underneath credit card debt after losing their jobs. The tales are enough to make anyone fear and swear off all forms of debt.
Well, I’d like to stand up and defend debt and its importance in the modern American’s life. While taking on too much debt leads to financial difficulty, debt can also be utilized by savvy Americans (like you!) to build a strong financial base.
First, let’s take a look at credit cards. If you use them for frivolous spending, you’re going to get in trouble. If you can’t afford it now, what makes you think you’ll be able to afford it later?
However, credit cards can also be a very good way to build your credit. Use your credit card for necessary purchases like groceries and gas, then pay it down every month, and you’ll earn a high credit score that will not only allow you to qualify for loans like mortgages, but also get you lower interest rates on those loans. Small personal loans can also help you rebuild your credit when you work with your bank or credit union. (Contact us to find out how!)
I just mentioned mortgage loans, so let’s take a look at those, too. Recently, many consumers have turned away from homeownership, choosing instead the smaller commitment of renting. Obviously, it’s a lot easier to walk away from a $1,000 deposit when you can no longer afford the rent than to go into foreclosure for a $100,000 loan when you can no longer afford the mortgage.
Here’s the downside to renting, though. Rents have increased drastically with the rise in demand, meaning that your monthly rent is probably about as much as your monthly mortgage would be for a reasonable house. However, when you pay rent, you are only paying for the benefit of spending another month in someone else’s home. When you pay a monthly mortgage instead, you are essentially stashing away money in your own home.
Assuming your home doesn’t go down in value (which, considering the market has already crashed, is extremely unlikely), when it comes time to sell it, you will have saved a chunk of change in your home that you will get back. And, if your house actually went up in value (likely, since the market seems to have hit bottom), you’ll get more back than you put in! That’s a much better deal than simply saying goodbye to thousands of dollars in rent after 4 or 5 years. (As a caveat, I would like to say that there are smarter and less smart housing choices to make out there, so do your research!)
I could go on even more about the ways debt can help you succeed financially: small student loans let you continue your education and extend your job opportunities, HELOCs can allow you to consolidate your existing high interest rate debt underneath one low rate, saving you hundreds or thousands of dollars on interest…But I think I’ll stop here.
My examples should make it clear that debt isn’t necessarily a bad thing, and I hope they help combat the bad rep that debt has earned recently. Like certain power tools I’ve tangled with, debt can be a dangerous thing, but it can also help you enormously as you build your financial future. Just remember: Handle it wisely.
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