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Debt is not all bad. Some people might find it hard to believe. After all, having too much debt can compromise a lot of things in your life.
If you fail to pay back your debt, it can ruin your credit reputation. It can also influence your career choices. Some people want to shift careers but they cannot do so because they need to maintain a certain level of income to afford their debt payments. They are forced to choose a stressful high-paying job over a low-paying job that makes them feel more fulfilled. There are also people who want to stay at home to take care of loved ones but they cannot do so because of the debt payments that they have to meet.
These are only some of the ways that debt can control your life. But one thing that borrowers fail to realize is that debt is only a problem because of the way we react to it. Debt can be a good thing in your life but you have to be responsible for it. You should know how to pay it back properly and to regulate the amount that you will borrow.
To prove that debt is not bad, let's discuss three instances when it can result in something positive in your life.
1. Debt can help you finance expensive investments
First of all, debt can help you pay for expensive investments – like a home. According to the data from Freddie Mac, home prices in the US have risen. Only a handful of people can buy a house with cash. And even then, it might not be a good idea to do so. There are three reasons why a mortgage might be better:
A mortgage will keep the cash liquid. The truth is, being a homeowner involves costs (property taxes, insurance, renovations, etc). You need cash to pay these off. If you deplete your cash reserves because you wanted to buy a house in cash, you might end up stressing over how you will pay off your other financial obligations.
A mortgage will allow the cash to be used for investments. Instead of using your cash to pay for the house, you are better off investing it instead. The average mortgage interest rate for a 30-year fixed mortgage is 4.16%. A typical stock market return is usually 6% to 7%. If you invest your cash in the stock market and use a mortgage to pay for the house, you are saving between 2% to 3%.
Mortgage interest payments are tax deductible. Finally, you can apply for a tax deduction for the interest in your monthly mortgage payment. This will not be possible if you pay for the house in cash.
A house is a good investment because the value of land goes up over time. If you sell your house when the value is higher than when you first bought it, that would earn your money from your real estate investment.
2. Responsible credit use can keep your credit score up
Your credit score is another reason why debt is not bad for you. As you all know, your credit score plays an important role in your finances. A CNN article explained that credit scores are used by lenders to determine if they will lend you money and how much interest they will charge for it. If you need a loan to buy a house, you want to have the best interest rate for these loans so you can save money as you pay it back.
To maintain a high credit score means you have to keep using credit responsibly. Do not just borrow money. You need to follow these basic rules to keep your credit score up.
- Pay your debts on time. This is usually rule number 1. Late payments can damage your credit score significantly.
- Control your debt level to be 30% of your credit limit. If your credit limit is $10,000, your total debt level shouldn't be above $3,000. After reaching this point, do not use credit until you have paid off this debt.
- Avoid applying for several debts at the same time. Getting a lot of hard credit inquiries will bring your score down. Time your applications and make sure you only borrow one type of debt at a time. Even if multiple lenders pull a hard inquiry on your credit report, it will still be considered as one.
- Maintain different debt types. There are many types of debt. You have revolving debts like credit card debts. There is also the non-revolving debt like mortgages, car loans, or personal loans.
3. Debt can be used to get you closer to your goals
Finally, debt is not all bad because it can help you reach your goals. A perfect example is a student loan. According to the data from College Board, those with a higher education can earn a bigger income compared to those who have a lower educational attainment. However, some students find it hard to get a degree without financial help. This is where student loans can be of assistance. But beyond the ability to get a degree, the positive effect of debt extends to other areas in the borrower’s life.
- Forces young adults to learn how to deal with debt. Federal student loans are borrowed from the government. Defaulting on the loan is not a good option. This forces young adults to be responsible for paying off their debt.
- Allows you to build a credit score. If paid well, student loan debt can help young adults build a good credit score.
- Serves as a practice to deal with other debts in the future. Since this is one of the first types of debt that you will encounter, it can be a training ground for future debts that you will borrow. If you will get an auto loan or a home loan, you will learn how to pay these off properly through your student loan experience.
As you can see, these three situations prove that debt is not always all bad. Of course, it can only be beneficial if you learn how to use debt positively – so make sure you make smart choices when it comes to the use of debt.