IN GENERAL, INDIVIDUALS SHOULD BE ADVISED to avoid borrowing whenever possible, particularly if it involves high interest payments, which, if not managed carefully, could adversely affect your wealth and creditworthiness.
However, Troy Bygrave, business relationship and sales manager at JN Bank, says there are many ways that credit can be beneficial, so avoiding credit at all costs is not necessarily the wisest decision.
“Loans are there to help you acquire assets so you can build wealth. Very few people earn enough money to buy cash for life’s most important purchases, such as a house, a car, or college; So credit is there to support that,” Bygrave explained.
The goal is to borrow prudently, he stressed, warning that “borrowing should never be taken out just for consumption.”
“You should always consider how you’re going to make money or benefit from the funds you’ve borrowed,” he advised.
GOOD AND BAD DEBT
The most important consideration when buying on credit or taking out a loan is whether the debt incurred is good or bad debt.
To better understand the concept of a good loan, he said that the old adage “it takes money to make money” is quite applicable in this situation. “Good debt helps you generate income and increases your wealth,” he advised.
The JN banker gave examples of good debt, including taking out a student loan to fund college, buying a home, consolidating debt or starting a business.
“A university education increases your value as an employee and increases your potential future income. In general, the more educated a person has, the greater that person’s earning potential,” he argued.
He also found that education has a positive correlation with the ability to find employment; As a result, better educated workers are more likely to be employed in well-paying jobs and tend to have an easier time finding opportunities when needs arise.
“An investment in a university degree is likely to pay off within a few years of the newly educated worker entering the job market. Over the course of their lives, well-trained workers are likely to make a return
Hundreds of thousands of dollars in investments,” he said.
Bygrave went on to point out that taking out a mortgage to buy a home is also considered a good debt. “A home is generally an appreciable asset; and therefore, in most cases, your home is likely to increase in market value over time, enough to offset the interest you paid during the same period,” he explained.
He pointed out that residential properties can also be used to generate income by getting a taste, renting part or all of the home. He added that a car loan can also be a good debt, especially if the vehicle is essential to doing business.
“But unlike houses, cars and trucks depreciate over time. Therefore, it’s in the buyer’s best interest to pay as much upfront as possible to avoid overspending on high-interest monthly payments,” he advised.
Taking out a loan to fund a viable small business also counts as good debt, Bygrave advised.
“Making money is the whole point of starting a business. If this deal goes well, it will end up being worth far more than the loan you originally took out,” he said.
The JN banker added that borrowing also allows one to preserve his pool of savings and investments, noting that sometimes borrowing is better than diving into those savings or investments.
“Instead of using that money, borrow it; and let that money continue to make more money. Therefore, unless you have saved the funds for the specific purpose of that purchase, you should not have to extinguish your savings or income in order to acquire an asset,” he advised.
AVOID DEBT TRAPS
Debt becomes a real problem, ByGrave advised, when there is no reasonable purpose for borrowing and no specific and actionable plan in place to repay or manage the debt. For example, he found that many people get into bad debt when they borrow to buy items that depreciate quickly and don’t generate long-term income.
“The general rule for avoiding bad debt is, if you can’t afford it and you don’t need it, don’t buy it,” he said.
“If you use your credit card to buy a fancy pair of shoes for $20,000 but can’t pay the balance, these shoes will ultimately cost you more than $20,000, and due to the rapid development of fashion, the value of these shoes , you should consider yourself.” deciding to sell them to recoup costs probably could have been written off,” he explained.
Bygrave also noted that credit cards often get a bad rap, but said they can be a good tool. “A credit card is good credit if used properly because it is free credit. If you pay your bill on time and in full, you avoid interest at all,” he advised.
Additionally, the ability to properly manage a credit card is a good testament to how good they are with credit, should they require a much larger loan such as a loan. B. a mortgage or a loan for a business.
“Credit card debt only gets bad when you don’t follow the rules and spend money recklessly. One technique you can use when tempted to use a credit card is to ask yourself this question, “If you had the cash to make the same purchase, would you spend your money?” If your answer is no, maybe you shouldn’t make the purchase,” he said.
Another debt trap to avoid is taking out loans to supplement your income. It leads to a cycle of debt, ByGrave warned.
“Borrowing money to supplement your income is not a sustainable measure and will create an uncontrollable habit that will lead to very negative consequences for you in the long run,” he warned.
Instead, try to think of other ways to supplement your income, such as B. by earning skills or knowledge you may have acquired, such as fruit trees and plants at home.