Three Reasons to Maintain Debt

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The holidays are a time of celebration and happiness…until the credit card bill arrives. We’ve talked about how to avoid holiday debt, but does that mean all debt is bad? Read on to learn why “debt” isn’t always a dirty word. A change in perspective could change your life.

Too much of anything is unwise, but maintaining some debts can improve your:

1. Credit health. The Five Factors of credit scoring include payment history, debt utilization, credit length, new accounts and inquiries, and diversification. Without information to recommend these factors, your credit score can stall or even suffer. Use debt wisely to establish a strong financial background. For example, suppose you’re hoping to purchase a house in the next few years. The average homebuyer needs a combined credit score of 720 or higher to secure the best interest rate. Illustrate your comfort with installment debt by applying for a new loan now. Purchase something with fixed and manageable payments such as a new car or federally-backed education loan. Build your credit file by making deliberate and budget-friendly debt choices.

2. Strengthening habits. The best personal finance advice came from my grandfather. “Never buy something you want unless you can a write a check,” he said. Gramps had the right idea, and his advice is helpful when it comes to establishing strong habits. Take this concept a step further by applying it to credit usage. For example:

Marina wants to buy a new sofa. She has $3,000 to spend and has found a custom-made model she loves. During checkout, the associate asks Marina if she would like to use her department store card. “There’s no interest for 18 months,” the associate says. Marina decides to earmark her $3,000 and use her credit card instead.

Marina made the right choice for a few reasons:

  • Her credit card had a zero balance and had not been used in six months. Charging the sofa provided the opportunity to keep her account active.
  • Her overall credit utilization ratio was low (9 percent), allowing her to purchase the sofa without negatively affecting her credit score.
  • She has the money to purchase the sofa before the zero-interest period expires.

Consider your options when making purchases like Marina’s. Using credit could be the wise choice.

3. Just as we learned from Marina, sometimes it’s better to assume debt rather than pay cash. Why? Liquidity. Maintaining a healthy bank account is the best way to protect yourself from unforeseen expenses. Consider the following example:

Heather has $12,500 in private student loan debt. She recently inherited $15,000 from her aunt’s estate and is considering how to use it. She wonders if she should pay off her student loans immediately.

Don’t allow emotion to cloud your financial judgment. While Heather might feel relieved at the prospect of paying off her debt, it’s not the only choice. Instead, she could increase her payments to cover triple the minimum requirement. Increasing her monthly payments will allow her to:

  • Pay off her debt in less time while avoiding accruing interest
  • Save the majority of her inheritance for emergencies
  • Invest in retirement
  • Protect her credit when dealing with a chronic medical condition

Allow debt to enhance your flexibility. Talk to a qualified financial planner before making a final decision.

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