When Debt Hurts and Helps
Americans have a “love/hate relationship with debt,” said Ben Steverman in Bloomberg .com. Eight in 10 Americans have some kind of debt, whether it’s a mortgage, credit card debt, or student loans, according to a new report by the Pew Charitable Trusts. But though nearly everyone is at least a little bit in the red, “we judge each other harshly” for any overuse. Eighty-five percent of poll respondents said their fellow citizens use debt “to live beyond their means.” At the same time, 7 in 10 said debt is necessary to build wealth, and a similar number said debt has expanded their opportunities by making it possible to invest in a home or an education.
The key is to know the difference between bad debt and good debt, said Bruce Helmer and Peg Webb in the St. Paul, Minn., Pioneer Press. Inefficient or “bad” debt, like a big balance on highinterest credit cards, grows fast and offers no financial advantages like a tax deduction or the ability to earn back your investment. Efficient or “good” debt is fine, assuming you can pay it off over time. It can be used to acquire assets that grow in value, like a home, or increase your earning power, like a student loan. The idea isn’t to avoid debt entirely; it’s to have the right kind, and to make it work for you.
“I believed that to live a modern, comfortable life, I had to get into debt,” said Trent Hamm in Lifehacker.com. Using credit cards on short-term expenses is the biggest mistake I’ve ever made. When I got serious about digging my way out (and I eventually paid off every cent), I realized I could have a pretty good day-to-day life without extra debt. The biggest lesson I’ve learned is this: Except for the basics, “stop buying stuff you won’t remember in a week.” Comb through your bank statements and look for these purchases. If you can’t remember that chain restaurant meal, it probably wasn’t worth it.
Whatever you do, it’s crucial to pay off debts like credit cards or high-interest loans and mortgages before you hit your golden years, said Nicholas Pell in TheStreet.com. Worst-case scenario, “you might have to push retirement back so that you can pay off your outstanding debt.” Aggressively paying down your liabilities before you retire will also be good practice for living on a lower income. Assign any money you can save to your debt, starting with the credit card that has the highest interest rate. If things are really dire, set up a meeting with a credit counselor before tapping your 401(k) early.
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