Use Debt Wisely

Debt is neither good nor bad in and of itself.  It is a financial tool that can be used or abused.  You can get into an ocean of trouble if you abuse debt, but used well, it can help you build your financial freedowm.  Here are my thoughts on using debt wisely.

Stay away from credit card, payday loan, title loan and other similar debt.
I have used a credit card since my college days, but I have always paid off the balance each month and never had a card with an annual fee. Taking on revolving credit and just paying the minimum is something to stay away from or get away from if you are already there. How smart can it be, after all, to pay 5 times as much for that cute pair of jeans because you never get around to paying off the balance on them?

Although I’ve never used a payday loan or a title loan, I understand that they are very bad deals for the borrower. Seek other sources for funds.

Build your own credit history, don’t rely on your man’s.
After I married, my spouse and I opened a few credit cards in both of our names. Little did I know at the time that the credit history was building just for him and not for me! It was years before I opened my own card and took out some loans in only my name to ensure that I had some good credit history.

It simply amazes me that most businesses assume that if you live with a man and are married to him, that he is responsible for things! It actually just ticks me off. I have a company, registered solely in my name with the state. I get solicitations from companies with that company name addressed to my husband!

Understand your debt personality (it isn’t necessarily the same as your spouse’s).
My spouse is very debt averse. His first reaction to taking on debt (of any kind) borders on panic. His next reaction is to pay it off as fast as humanly possible. In today’s low interest environment, it makes sense to me to take on debt to invest in real estate or to take back a loan on the sale of a property. Both cause shivers up his spine. Understand your debt personality so that you can manage it and manage the differences between yours and his.

Use debt to build net worth, not to gratify your wishes.
Most of us take on debt at some point in our lives. My husband took on a car loan for his first car (his Dad co-signed the loan) – I paid cash for my first car! Our first married debt was credit card related, but that was temporary as we paid it off each month. Our next debt was a mortgage on some raw land. We had several car loans, a couple of mortgages and temporary credit card debt, but that is all so far.

We used the mortgage and land debt to build equity in the properties, thus building our networth. I have not taken out a line of credit against any asset in order to take vacations, do home remodeling, buy new properties or for any other purpose. Lots of folks are in mortgage hell right now because of home equity loans, lines of credit and falling real estate prices.

Consider family and friends debt carefully.
Whether you are on the lending or the receiving end, consider carefully whether you are comfortable with debt to or held by a family member of friend. Will you be able to forgive the debt if it is not paid back? How will you feel if you can’t pay your Dad back? Have you made sure that the terms of the loan are acceptable to your state and that tax law will be satisfied with the terms of the interest?

Done correctly, a family bank, loaning money to younger generations for valid and family supported purposes can benefit both the older family members who may be loaning the money (with higher interest than they could get from a bank) and younger members as well (with slightly lower rates and much better terms than conventional loans).