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Member I

Is all debt bad?

Is there any kind of debt that's good to use? Or should I always stay out of debt? Never get a credit card or take out a loan?

5 Comments
Member II

Is all debt bad?

I've always heard that you should take out a loan or get a credit card, just so there's something on your credit report...that is, someone with no credit history might get as bad a credit rating as someone with a bad credit history.

 

Is that still true?

Catalyst V

Is all debt bad?

Not all debt is bad.  Some debt probably can't be avoided.  Also, utilizing some debt establishes a credit rating which is necessary these days.

 

Using credit card debt is not necessarily bad.  If you use them responsibly, (by having a plan to either pay it off entirely each month, or, have a plan to pay off in a reasonable amount of time to minimize finance charges) they might be a good use of funds.

 

Also, buying a vehicle or home might only be achievable by taking out debt.  Not that many people can pay cash for vehicle(s) and/or homes.

 

 

Employee

Is all debt bad?

I agree with @LudwigVan_fan - not all debt is bad and you just need to use it responsibly. 

 

My advice is to make sure you find out what the interest rate is and what the terms of the loan/ credit cards are. 

 

The interest rate is usually called an "APR" - annual percentage rate.  This site has a good explanation of what that is and why it matters.  Essentially it's what you're going to pay to borrow money. 

 

Here's a quick example:

The loan or credit card has an APR of 15%.

You borrow $100.

At the end of the term (1 year in this example), you'd owe the original $100 plus $15 for $115 total. 

 

That extra $15 comes from the original $100 multiplied by 15% (or 0.15 - another way to write 15%). 

 

That's a very simple example and most loans and credit cards charge compound interest - where interest is multiplied by the new balance each term. This kind of interest, compound interest,  can grow VERY QUICKLY!

 

So be sure you know the interest rate, aka: APR, and the terms - how often the interest is charged.  

 

This is also a decent intro video to the idea. 

 

 

Visitor I

Is all debt bad?

You should avoid debt as much as you can, but using credit card wisely can help with credit score. The way I do it is by setting up automatic statement balance payoff for each of my credit cards online from my bank. I use YNAB as my budgeting software to ensure all my expenses can be covered with Cash, both long term and short term. So I always know I’m able to pay off credit cards in full each month. By paying off all my credit card balances a few years ago and using this strategy, my credit score increased from 632 to 800+. I still have Student Loans though which is another story and I’m trying to end that story as soon as I can. I also use credit cards that gives me cashback or airline points. So nowadays, I pay no interest to credit cards and instead get paid back for using them regularly.

Catalyst V

Is all debt bad?

It's a personal choice. I gave up all credit cards about 8 years ago, and have never been happier or more at peace since. In that time I've managed to pay off two cars. Having replaced one of those cars 4 years ago with a brand new 2013 Rogue that I paid cash for means I still own two cars free and clear. Also in that 8 years I"ve managed to pay off 1 of the three rentals I have mortgages on. Was great when the insurance company sent me a yearly insurance bill with a 10% increase and I was able to tell them "stick it where the sun don't shine" which promptly resulted in a 20% decrease in that bill.

With only my primary residence and 2 more rentals left to pay off (which is going faster with the rental income from the paid off rental and the fact I have no car payments or credit card payments)  I'm looking at being debt free in the next 5 years or so.

I'm tired of working for money and just handing it over with exorbitant interest to lenders. I don't have a problem with paying my share of taxes. But if I'm going to pay taxes on the money my earn, I want to pay taxes on the money I "KEEP", and not the money that is spent before I've even cashed the paycheck.