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Are you in Good Hands?


We’ve all heard about the dangers of sinking into debt. Yet, for most of us, borrowing will be the only way to cover some big-ticket expenses—such as purchasing a home, buying a car or putting a child through college.

When tackling debt, it’s important to remember one thing: Not all debt is created equal. When managed responsibly, the right kind of debt can actually help you build stronger credit and even improve your overall net worth. The trick is to know how much and what kind of debt makes sense.

Did You Know?

$15,706 The average U.S. household credit card debt (of households carrying debt)

Vet Your Potential Debt In some cases, borrowing creates value. For example, the education you receive with the aid of a student loan can land you a better, higher-paying job. A mortgage may enable you to buy a home that gains value over time. What’s more, the interest on both student loans

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and mortgages is tax deductible, which makes it more likely that you’ll come out all right—or even ahead—in the long run when you borrow to fund your education or a home.

On the flip side, using your high-interest credit card to finance a fancy trip won’t yield a return. And taking out a loan to ditch your trusty hatchback for a convertible doesn’t create value. Your vacation tan will probably fade before the high credit card bill arrives, and cars depreciate in value the moment they’re driven off the lot.

It pays to be smart about borrowing. The best debts to take on are those that have the potential to produce value, that are tax deductible, and that satisfy a need rather than a want.

Assess What You Can Afford Remember that all borrowing comes at a price. Credit card debt tends to carry high interest rates, which generally makes it the priciest debt to carry and therefore the best to avoid. Interest rates on mortgages and student loans tend to be lower, but there are exceptions. So just as you check prices when you shop for gas, groceries or clothes, it’s a good idea to hunt around for the best borrowing terms.

Also, even “good” debt can turn bad if you take on more than you can afford. Missing payments can sink your credit score or even put you at risk of foreclosure or bankruptcy. On the plus side, consistently paying back your debts in a timely fashion helps you build strong credit. A little financial diligence can go a long way toward ensuring that you land—and stay—on your feet. One good rule of thumb is to make sure that all of your monthly debt payments—mortgage, credit cards, car payments, etc.—add up to less than 36% of your gross monthly income.

The bottom line? Sometimes it makes sense to borrow—and sometimes it doesn’t. But when you apply some financial discipline, it’s easy to tell the difference.

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