The choice between good debt and bad debt is obvious. As much as possible, you only want to have good debt under your name. Bad debt leads to bad credit, which Trader highlights can prevent you from making investments that can be key to a good financial future. Some investment clubs judge investors based on their credit report, as do stock trading apps, while bad debt can make it impossible for you to get a loan to launch your business ideas.
That said, here's how you make debt work in your favor:
Take out a mortgage — or two
Mortgages are generally accepted as the best debt you'll ever have, especially if you have good credit. The interest rates are low and you're getting your money's worth through homeownership.
It's even more profitable if you're an investor. Real estate remains to be one of the best options for long-term investment, as it has a high tangible asset value, long-term appreciation, and less volatility than stocks. If you're an investor with a lot of capital, it can make more financial sense to purchase several properties and take out a mortgage for each than pay cash for one property. As long as you can continue leasing each one, you can simply repay the mortgages with the rental fees and accrue income over time. However, this plan is more suited for seasoned investors who understand how real estate markets work and who have a lot of funding.
Be smart about education
All good debt comes with a downside. Our 'Good Debt vs. Bad Debt: What's the Difference?' article notes that student debt can be risky, too — it's hard to tell if a college degree will pay off in the long run. That's why you need to be smarter about student loans, and you don't need a college degree to do so. Other than choosing the correct type of loan, financial adviser Stephen Gunter II emphasizes researching on the industry outlook of your or your child's chosen field. Look at factors like employment rates and median income, which should help you decide on the degrees that have a high earning potential.
Pay off your credit cards on time
While credit cards create easy opportunities to build credit, they can very easily become your ticket to incurring bad debt. This is especially true if you have several under your name, as Petal Card points out that keeping track of your spending will be your biggest challenge. Without careful self-monitoring, you may simply forget to pay or you may not have enough to cover even the minimum payments of each card. In either case, the late fees and interest rates will be your enemy and can quickly add up into a mountain of bad debt. This is why paying your credit card bills on time is a must — or better yet, try sticking to only one card if you're still mastering fiscal responsibility.
Avoid payday loans
Desperate times call for desperate measures, and often in the form of payday loans. However, these loans are notorious for having high interest rates over a very short period of time. In fact, you can expect to pay an interest of $75 for a $500 loan in just two weeks — and that's a common practice for payday lenders. There are no good sides to payday loans, which is why you should avoid them at all costs.
Take out a home equity loan
A home equity loan is generally considered a good debt, and it's one that you can actually use to pay off your bad debts.
Fox Business explains that this type of debt has lower interest rates than average loans, which is why it's a common debt consolidation method. A home equity loan shouldn't be used as a free pass, however, as inability to pay can mean losing your home or your investment properties.
