CONTRIBUTOR Christy Bieber –The Motley Fool 9.11.2019
The majority of Americans with good credit understand a key fact about borrowing — do you understand it too?
When it comes to debt, there are lots of different opinions out there. Some financial experts, for example, advise swearing off all debt — except perhaps a small mortgage. Many people have bought into this mindset and believe debt is always bad and should be avoided at all costs.
Not everyone believes debt is inherently bad, though. In fact, a recent survey commissioned by LightStream revealed that the majority of people with good credit have a much more nuanced view of debt. And their understanding of the role that debt could play will likely put them in a better financial position than those who refuse to borrow even when it makes sense to do so.
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Americans with good credit take this smart approach to debt
According to LightStream’s research, 79% of Americans who have good credit (defined as a score of 660 or higher) believe that purposefully taking on debt can help them to accomplish financial goals.
The nearly 8 in 10 Americans with good credit are correct. Debt can be a bad thing if you borrow using the wrong types of loans, if you aren’t responsible with payback, or if you borrow for things you don’t need.
But purposeful borrowing — taking on loans for important purposes after shopping around to find the right lender — can help you to improve your financial situation and even grow your net worth.
How can purposeful debt help you financially?
Taking on debt to accomplish financial goals can be a good thing for a number of reasons.
One of the most obvious benefits of borrowing is that if you do it responsibly, you can improve your credit score. If you avoid all debt, you won’t have a credit score — and if there does come a time you need a loan, such as to buy a house or car or pay for college, you’ll have a much harder time getting one.
Having no credit score can also hurt you in other ways. Landlords, utility companies, cell phone companies, auto insurers, and a whole host of other companies regularly check your credit when deciding whether to do business with you and on what terms.
There are other benefits to smart borrowing too. You can afford to accomplish things that increase your income or assets and that you might otherwise be unable to do, such as starting a business or getting a college degree. You can also make smart use of your money. For example, if you can get a mortgage at 3.5%, it makes sense to borrow to buy a home instead of paying cash. This is because you could invest that money in the stock market and earn returns that are likely well above 3.5%.
How to borrow purposefully
If you want to borrow purposefully to accomplish financial goals, it’s important to understand what purposeful borrowing means.
First and foremost, it means not borrowing for things that you don’t need or that won’t help you in the long run. Borrowing to pay down higher interest debt makes sense, for example — borrowing for a vacation does not.
It also means being smart about the loans you take out. Mortgages and student loans are usually affordable and are considered good debt because this type of borrowing should theoretically increase your net worth. But taking out payday loans is pretty much always a bad idea due to the very high fees you’ll pay.
Personal loans and credit card debt can sometimes be good and sometimes be bad. If you can qualify for a 0% APR credit card or a loan at a low interest rate and you use the funds responsibly, for example, then these types of debts aren’t necessarily bad. It depends what you use the proceeds for.
Be smart about how you borrow
Whether you already have good credit or you’re still working on improving your score, you can take the smart attitude towards debt that the majority of Americans with good credit have. Simply make the decision that you’ll use debt responsibly to borrow in order to improve your credit and increase your wealth — and swear off bad debt that does nothing but cost you.
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