Debt is a four-letter word – and it’s often used like one. We avoid it. We spurn it. We don’t mention it in polite company. But debt isn’t all bad. In fact, debt can actually help you build wealth – if you learn to use it wisely. Navigator Credit Union can help you sort out the good from the bad.
Good vs. Bad
Generally, debt is considered good if you use the money to buy something with the potential to grow in value. A college education stands to boost your earning power throughout life, so a student loan may be a good debt. Owning a home gives you a place to live and affords you tax advantages, plus the home’s value may appreciate over time, so a mortgage is often a good debt. But even good debt has a few warnings: Be sure to borrow only what you can afford to pay back, and shop around for the best credit union loan rate.
Using credit to buy disposable goods (like a T-shirt or a pizza) or anything that falls in value would result in bad debt, which can quickly stanch your cash flow. For example, if you charge a $500 high-definition TV to a credit card with a 17% interest rate, you could end up forking over $622 in total if you took just three years to repay the debt and paid only the minimum. And the higher the purchase price, the more interest you’ll pay.
But the line between good debt and bad debt isn’t always so stark. For instance, you may find it necessary to buy a car in order to hold down a job, but lack the funds to purchase it outright. While a car doesn’t have much potential to grow in value, it doesn’t have to be a bad debt. The trick is to be conservative and buy only what you can afford.
Where Do You Stand?
Most money savings experts recommend spending no more than 36% of your monthly income to pay off debt. Most lenders will consider this figure – called a debt-to-income ratio – when determining whether they will lend you money, and at what rate.
Do you know your debt-to-income ratio? A BALANCE? Financial Fitness counselor can help you assess your financial picture and suggest ways to improve it, all at no charge to you. Just contact BALANCE at 888-456-2227 to get started. Establishing a savings deposit program with Navigator can also help you avoid or reduce future debt. Call 228-475-7300, visit www.navigatorcu.org or stop by a branch today to learn more.