Some types of long-term debt are actually good. Why? Because they can earn you money over time. Throwing clothes or trips you can’t afford on a credit card can do just the opposite — hurt your finances and your credit score. Read on to find out the differences between types of credit that pay off and those that’ll cost you.
How much is too much?
Using your credit card responsibly is a great way to build credit. Just make small charges, pay them off quickly and make payments on time. According to USA Today, in 2008, college seniors with at least one credit card graduated with an average of $4,138 in credit card debt. That’s a lot to owe when you’re just starting out. Since most items people buy lose value instead of gaining it (hello used CDs and used cars), this is the type of debt that will cost you. Find out how much using our Cost of Credit Calculator.
A few good examples.
Here are a few instances where debt can work for you:
1. College loans. Creditors usually see college loans as good debt. But look for government-backed Perkins and Stafford loans over private loans, do your research on interest rates and make sure your payments won’t be more than 10% of your monthly income once you graduate. You can project your costs and income here.
2. Buying a home. Hey, it could be a few years down the road but make a mental note: buying a home can be one of the best ways to build wealth. Home values have gone up an average of 6.5% per year over the past 30 years. When handled right, this is the type of debt that pays off.
3. Business loans. If you’re an up-and-coming entrepreneur, this one’s for you. Investing in a new business that ends up becoming successful can also qualify as good debt.
The bottom line.
Use credit cards responsibly and make sure your long-term debt falls into the “Good Debt” category. For tips on paying off debt, click here. Find out simple ways to build your credit score here.
For more information on credit and boosting your credit score, check out Breaking the Code.
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