If you’re like most people, you probably think of debt as a (sometimes) necessary evil. After all, debt allows you to get things you want—like a new car or a bigger house—without having to save up for them first. But is that really such a bad thing? Debt certainly has its pros and cons, but in this post, we’ll take a look at four reasons you may want to rethink your relationship with debt:
1. Debt can be a tool for building wealth.
If used wisely, debt can be a tool for building wealth. For example, if you invest in a rental property, the mortgage payments you make eventually lead to equity ownership in the property. Or, if you use a loan to start a business, the profits from that business can help you pay off the loan and build wealth over time. Of course, this only works if you make your payments on time and avoid defaulting on the loan.
2. Debt can help you build credit
An unblemished credit history is essential if you’re looking to buy a house or a car or get a better loan interest rate. It just so happens that one of the best ways to build credit is by using debt responsibly. Showing lenders you can handle borrowing and repaying your debt on time goes a long way in helping you get the best terms possible on future loans.
3. Not all debt is bad debt.
There are such things as good debt and bad debt. Good debt is typically associated with investments that appreciate in value over time, like a rental property or a college degree.
Bad debt is often associated with purchases that depreciate over time, like an expensive car or designer clothes. It’s important to differentiate between good and bad debt to decide how to use your money best.
If your financial picture deteriorates and you’re finding it harder to pay all your debts, you should consider debt consolidation. This is the process of combining several debts into one. Consolidation is typically achieved by taking out a new loan that combines your separate debts, allowing you to make one payment to one creditor instead of paying several creditors with different due dates for each debt.
Understanding that debt consolidation may be an option if circumstances become unmanageable can give you the confidence you need as you acquire “good debt.”
The Bottom Line
When used correctly, debt can be a powerful tool for consumers to build wealth and improve their credit history. However, it’s essential to understand the different types of debt and how they can impact your finances. By understanding the benefits of using debt responsibly, you can make informed decisions about how to use it to reach your personal goals.
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