Sometimes taking on debt strategically can help you spread a cost out over a longer period of time, or it can help you stay afloat.
In some corners of the personal finance advice world, getting into debt is just about the worst thing you can do. And yes, some forms of debt — particularly those that charge high interest rates — can keep you locked in a cycle of owing money for years.
Still, there are times where taking on debt serves a purpose in your overall financial picture. Debt isn’t always bad, though there is always a risk of getting in over your head. It’s simply a tool you can use to afford a very large purchase without draining your savings. Mortgages are commonly cited as an example of good debt, since a home can appreciate in value. “That’s not a bad debt to have; it’s going to 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 financial risk.
To fund a major purchase Now for the bad debt: credit cards. Not only do they charge high interest rates, but you can keep putting purchases on them even if you still owe money from prior months. It’s easy to end with a balance that keeps growing, no matter how much you try to chip away at it. 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 cash for home renovations. Homeowners can opt to do this instead of putting renovation costs on a credit card charging a higher interest rate.
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