In some corners of the world of personal financial advice, getting into debt is the worst thing you can do. And yes, some forms of debt, especially those that charge high interest rates, can keep you stuck in a debt cycle for years.
However, there are times when debt taking has a purpose in your overall financial picture. Debt isn’t always bad, although there is always a risk of it getting over your head. It is simply a tool you can use to afford a very large purchase without draining your savings.
“I think it’s so important for people not to be afraid of debt, but to see it as something you can use to your advantage,” says Kara Duckworth, a certified financial planner and managing director of customer experience at Mercer Advisors.
Here are some examples of when the ability to borrow money can come in handy.
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For something that could increase in value
Debt is often classified as good or bad, depending on why you are borrowing money and how much you will pay in interest.
“A good debt can help you move forward with your career and life,” says Mark Reyes, a certified financial planner and senior financial assistance manager at the Albert Financial Services app. “On the other hand, bad debt can prevent you from achieving your goals.”
Mortgages are commonly cited as an example of good debt, as a home can appreciate. “It’s not bad debt to have; it will put a roof over your head, “says Bill Hampton, a certified financial education instructor and CEO of Hampton Tax and Financial Services in Atlanta. Of course, borrowing more than you can afford or not understanding the terms of the loan can cause risk. financial.
Student loans are another generally agreed upon example of good debt, as your education can increase your earning potential throughout your life. According to Hampton, “You will be in debt for a number of years, but it will give you a higher paying job. But if your specialization doesn’t support your debt, it may hold you back.
To finance a major purchase
Now for bad debts: credit cards. Not only do they charge high interest rates, but you can continue shopping on them even if you still owe money from previous months. It’s easy to end up with a balance that keeps growing no matter how hard you try to unravel it.
However, some credit cards offer interest-free promotions that you can use for a major purchase. These promotions allow you to spread a cost over many months, often 12 months or more, depending on the card. Make sure your budget allows you to pay it back in the promotional time frame, though, before interest kicks in.
If you have an existing debt, balance transfer cards allow you to move that debt and pay no interest for months. But as always, make sure you understand the terms of the card you use – you’ll likely pay a transfer fee, and the interest rate will go up once the promotion ends.
Once you own a home, borrowing against its value in the form of a home equity loan or home equity line of credit – or HELOC – can free up money for home renovations. Homeowners can choose to do this instead of charging the renovation costs to a credit card by charging a higher interest rate.
“Depending on how much equity a person has and based on their specific situation, it might be better to draw on that than a credit card or personal loan,” says Reyes. “He is a bit the lesser of two evils.”
To withstand unexpected costs
You’ve already heard the lesson. You must have emergency savings. But that’s the problem with emergencies – they happen randomly and sometimes simultaneously, regardless of whether you’ve been able to save money or not.
These are the times when you may need to make the best and least optimal decision, and that can mean taking on debt. HELOCs and personal loans can be a low-interest way to borrow money to cover an emergency, but credit cards can also act as a backup source of emergency financing.
If an emergency expense causes you to pile up on credit card debt, Hampton recommends making a plan to repay that balance with some salaries. You can also take other actions to reduce the cost of your debt, such as shifting the debt to a balance transfer card or seeing if your credit card company will meet you halfway.
“Consider calling your credit card company and trying to negotiate an interest rate that is lower than what you’re being charged,” Reyes says. “It’s not always successful and it’s not likely, but it’s worth a try.”
This article was written by NerdWallet and was originally published by The Associated Press.