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Staying Financially Fit | Good Debt vs. Bad Debt

Alerus | JUN 06, 2019

You may have been taught that debt is a bad thing to have in personal or business finance. The truth is a little more nuanced. Sometimes one kind of debt is better than another, and sometimes the same loan with the same interest rate and terms can be “good” and “bad” depending how you’re using it. How can you know the difference? Here are a few pointers:

Bad debt can weigh you down and hold you back

High interest, inflexible terms and no equity – the unholy trio for debt. When you use debt to buy things that will decrease in value, in general that’s a bad thing – you end up paying more for something than it’s worth, and it’s too easy to fall behind and get penalized. Worst case: Using high-interest debt like credit cards for regular monthly expenses.

Shop around for credit cards, lines of credit or loans with the best terms possible. Some items, like cars or certain business equipment, cost more than most people or businesses have lying around in cash. These items will depreciate but are necessary. Maintain a high credit score by managing debt over time, and when these necessary expenses come up you’ll get better terms.

Good debt can help you lift yourself up

Buying a home, student loans or investing in a business expansion can be good debt. If a loan helps you make a personal or professional leap so you earn more, or lets you invest in something that may grow, it most likely is good debt – as long as the underlying investment is sound. Even for good debt, shop around. Mortgages, lines of credit or loans can have variable interest rates and costs, and some products offer increased flexibility and potential tax benefits.

Be proactive to make any debt better

Whether you’re looking for debt to make a leap, or looking to manage debt that’s holding you back, financial consulting with Alerus is a good first step. You’ll work with experienced advisors who have seen it all before and will have ideas to help you make debt work for you instead of the other way around.

It’s easy to lose track of debt you don’t see. Credit cards will rack up interest if you only make automatic minimum payments. Make timely payments on your loans. This will impact your credit score which determines the interest rate you will receive. Apps and other tools help keep debt in focus, show you how to pay it down faster or help you chip it down in small bites.

Visibility is empowering: use debt management tools
Consolidating bad debt into good debt is sometimes an option.It can be worth revisiting your good debt, too. You may be able to obtain a lower rate or better term which can make a big difference in how much you end up paying. In addition, some mortgage debt is tax deductible. Pay attention to opportunities and act on them.

Whether you have good debt, bad debt, or both, financial consulting with Alerus is a good first step. Let our experienced advisors, who have seen it all before, help you make debt work for you - whether good or bad!

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