Is There Such a Thing as ‘Good’ Debt?

student loan debt

As unfortunate as it may be, many of us are going to be faced with debt at some point in our lives. Whether it’s credit card bills, student loans, or a mortgage, there are numerous ways debt can weasel its way into our finances. But what if I told you that debt didn’t have to be a bad thing? While it isn’t always the best way to get the things we need, debt can be an incredible financial tool if used effectively.

So, to help you minimize the chances you’ll take on bad debt, here are five questions you may want to ask yourself before signing off on your next major loan.

1. Is This The Best Way to Get What I Need?

Before taking out a personal loan or opening up another credit card, you should consider asking yourself if this is the best option for you. For example, is it really necessary to purchase a new car with this new car loan right now or can it wait till you have more money saved? Rather than paying interest, maybe it’s best to wait until you have enough money to purchase this outright or at least take on a smaller loan size.

2. Can I Afford the Monthly Payments?

You may have enough money for the down payment on your loan, but you should ask yourself if you will have enough money to make monthly payments for the next five-or-so years. Can you truly afford the payments? If you think you will be struggling, then your debt can go from “good debt” to “bad debt” rather quickly. When adding this additional debt, always try and find out what your term is. This will feel like an end-goal knowing you can have this debt paid off in five years, if you can afford it, rather than 10.

3. How Does My Credit Look?

Before taking on any new debt, you should consider checking your credit report and make sure that you haven’t had any missed or late payments. This is important because if you have managed your debt well in the past, then you’ll get better loan terms in the future. If you have a good credit score and credit report, then you may get a better loan. If you don’t, then sometimes it is harder to get the loan you are looking for, especially if it’s a larger loan from a private lender. It’s a good idea to check your credit before you fill out any applications. You can do so by viewing your two free credit scores each month on Credit.com.

This goes the same for a credit card. Before you receive a new credit card, you first have to see if you qualify or have enough credit for one. If you have bad credit or a low credit score, your application may be denied.

4. Will This Debt Overwhelm My Budget?

As you get older, saving becomes more and more important. Before taking on this new debt, try and make sure that you will still be able to save towards your retirement or savings. To make this easier, consider budgeting. Add this additional debt to your budget to see how much leftover money (if any) that you will still have. If your budget is tight, then consider cutting back on your payments to your savings account. Instead of contributing 10% of your income to your 401K, maybe stick with 5% until you can fully manage paying off your new debt.

5. Is This a Reputable Lender?

Whether you trust your lender or not, when taking out a loan you should consider getting a second opinion. Try not to go with the first bank that offers you a flat interest rate. Shop around for interest rates and terms before making your decision. You want to make sure that you are taking out the loan that is right for you, don’t be pressured to make your decision right away.

Depending upon how it’s acquired, debt has the potential to be a major burden or boon on your life. Before signing on the dotted line, consider taking the time to ask yourself these questions to make sure this new debt is right for you. Debt has the power to make or break your financial future, so you may want to be sure you give it as much time as you can to think over the situation.

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New Study Finds Your Debt Could Be Hurting Your Kids

killing your budget

Certain types of debt may be hurting your kids, a new study shows.

Researchers at Dartmouth and the University of Wisconsin at Madison found that children whose parents had higher levels of mortgage and student debt fared better emotionally and behaviorally than children whose parents had higher unsecured debt (i.e. credit cards, medical debt, payday loans).

The results show that children may benefit when their parents own a home and/or have higher levels of education (which, more often than not, require a certain amount of financing). Conversely, kids can be negatively impacted when their parents have high levels of unsecured debt, which may create stress or anxiety for parents and may hinder their ability to exhibit good parenting behaviors.

Debt Is a Double-Edged Sword

“It makes intuitive sense that debt that can help you improve your social status in life and make investments — taking on student loans to go to college or taking on a mortgage to buy a home might lead to better outcomes, while taking on debt that is not tied to these investments (such as credit card debt), may be more harmful,” Jason N. Houle, assistant professor of sociology at Dartmouth, who co-authored the study with Lawrence M. Berger, director of the Institute for Research on Poverty and professor and doctoral program chair in the School of Social Work at the University of Wisconsin-Madison, said in a press release. “Overall, our findings support the narrative that debt is a double-edged sword.”

The study followed 9,000 children (ages 5 to 14) and their mothers annually or biennially from 1986 to 2008. The childrens’ socio-emotional well-being was measured using a set of 28 questions to mothers that looked at frequency and severity of child behavior.

The study also measured the total personal debt not incurred from having a business, including: home debt (mortgage or home equity loans); education debt (student loans); auto debt (loans to buy a vehicle); and unsecured debt, such as credit card debt, medical debt, payday loans and other types of debt not tied to an asset.

Unlike other studies that compare families with a lot of debt to families with less debt, Houle and Berger looked at the same families over time, and examined how children’s behavioral problems changed as their parents moved into and out of debt over the course of their childhood.

“What we do in this study is a bit different,” Houle said. “That is, we follow the same families over time and essentially ask: what happens to children in families as their parents take on (or discharge) debt over time. Thus, we’re fundamentally making a ‘within-family’ comparison.”

For instance, in addition to the findings of unsecured versus secured debt, the study found that an increase in a family’s unsecured debt (from $5,000 to the sample average of $10,000) led to an increase in child behavior problems.

Avoiding Debt Can Be Difficult

“I think it is common to assume that those who are struggling with debt are those who have made poor financial decisions or are irresponsible but the research shows that the reality is quite different,” Houle said. “For those who are taking on a lot of credit card debt, or are buried in medical debt, or have payday loans – for many, it’s the only choice they have. In an era where wages have stagnated and costs have risen but credit has become more readily available (due in large part to financial deregulatory policies at the state and federal level over the past three decades), families are going into debt to help make ends meet and keep their head above water.”

If you have a lot of unsecured debt, you may want to consider a balance transfer credit card or a debt consolidation loan. In terms of keeping debt costs down, it can also help to stay on top of your credit since a good credit score will entitle you to more affordable financing. You can get your free credit scores each month and find out how much your debt will cost you in a lifetime on Credit.com.

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