Growing up, my family never had much money. In fact, sometimes it felt like we always had negative money. Unfortunately, my parents spent a lot of time in debt. That has made me really apprehensive about dealing with money, and especially about dealing with debt and loans. But I know that it’s really hard (if not impossible!) to get through your whole life without ever taking on any kind of debt, so I thought I’d reach out to the experts and see if I could learn how to view debt in a healthier way.
Debt can be a scary thing. When we have too much debt, we struggle to keep up with payments. Interest can grow and outpace our ability to pay it off, resulting in toxic debt that actually increases in amount even as we’re paying off as much as we can. And Americans don’t always have the best relationships with debt: most Americans are currently in debt, which is probably not a good thing.
But debt can also be good: without the ability to take our a little debt, we wouldn’t be able to carry credit cards instead of cash, and most of us would never be able to start a business, buy a home, or go to college. While it’s not a good thing that most Americans would need to take out a loan to cover a surprise $500 expense, it is a good thing that there are loans available to those people, so that the expense can be covered and (ideally) paid off over time.
What you must do is to learn the difference between good debt, bad debt, and necessary debt. Some types of debt can actually help us grow our wealth. Other types of debt can be our path out of more serious financial situations. It is only when the debt itself is unhealthy and a financial problem that we really need to fear it.
Generally speaking, “good debt” is the kind of debt that allows us to actively grow our wealth. A mortgage, for instance, is good debt: with a mortgage, we can afford to buy a home, which means we won’t have to waste money on rent. It also means that we gain an incredibly valuable asset that may even increase in value over time. As long as you pay your mortgage reliably, you’ll find that it’s a good thing, overall, for your finances.
Shorter-term debt is a little different. That doesn’t mean you should never have any, of course! Credit card debt, for instance, is common and not necessarily a problem. And if you need to cover a vital expense, you’ll be happy to know that lenders like MoneyKey are there to help you. Just be sure to seek out the best interest rates you can, and remember to pay off the debt as soon as you can.
Failing to pay debts is a real problem, of course, which is why you should be careful that short-term debt doesn’t become “bad debt.” Take credit cards: they’re short-term debt, and that’s okay. Buy something on a credit card and pay it off fast, and you’ll be just fine: you may even be better off, because you could get cash back on the card but pay off the purchase before you get any interest on it. But if you don’t pay in time, harsh interest rates can make your debt balloon fast, driving you into a bad debt cycle.
Even then, you won’t be out of options. If you’re ever in dire straights, see a financial advisor or lawyer for help. Look into debt consolidation (be careful, though: there are some scam artists out there) and, in extreme situations, you might even consider bankruptcy. But if you’re not in a jam yet, just remember how debt works and do your best to avoid bad debt while maximizing your wealth-building potential with good debt. If you use your common sense, you should be able to work with debt instead of fearing it.