Understanding Good Debt Vs. Bad Debt

Understanding good debt vs. bad debt would probably keep a lot of people out of financial difficulty in the first place, much like avoiding having to file for back taxes. If you know what a good investment would be, even though it's a revolving account, then you know which offers to accept and which to turn down. You'll be able to spot the credit cards that have a 30% interest rate and forget the fact that they are offering a $5,000 credit limit.

Instead, you'll know to go with the card offer that is going to give 9% interest and only a $1,000 limit. It's always possible to earn a higher credit limit but it's more difficult to get a lower interest rate, especially if that is their beginning offer. To learn about these kinds of decisions, many credit unions and banks will post relevant information. Learning how to manage your money is more than just paying your bills on time; it's learning which bills to acquire originally.

Helpful Debts to Acquire

Another thing to understand is purchasing a car and a home. These are good debts because every time you make an on-time payment, that is recorded with your credit score. Then, when you are trying to refinance your home or get another source of funding, your credit score will be higher. An example of bad debt is having a $3,000 limit with any company and using more than half of it. Of course, you want to use your credit and that's how you improve your score over time. However, there is definitely a ratio of debt to credit that you want to follow in order to optimize those opportunities. The easy way to think about it is that you should always have much more credit available than you're actually using at the time.

The reason for this is that financial funding sources look at how you manage your credit in the same way you manage actual cash. If you are running down to the last dollar every month and not planning ahead for emergencies, then you're probably going to do the same thing with your credit. What does this mean in terms of them getting an on-time payment? If you're out of cash, how can you pay your bill? If you're running all your credit up to the limit on all of your cards, how can you be functioning efficiently? This is the balance you need to maintain if you want to appear as less of a liability risk for the money lenders.

Learning about Credit Use

While you may be a bit overwhelmed in terms of all the education sources available, there are plenty for free and that explain everything in layman's terms. These are set up for consumers who are brand new to credit card use, as well as those who just want to handle things better. Reading through these is an excellent way to learn more about the process and find out how debt can work in your favor. The key is to have enough cash to pay your bill on hand and not to let your credit card use go overboard.

As you start understanding good debt vs. bad debt, make a note if you are working with any financial advisors. They can clear up any subjects you don't understand or need more clarification on. Using their expertise and advice might give them a chance to give you other easy-to-understand examples. Also, because they help clients get in more stable financial positions all the time, they can give you some recommendations on which cards to keep and which to avoid using.