Understanding the ins and outs of debt can help your financial situation.
In challenging economic times, debt can be a four-letter word. But just as there are bad reasons to take on debt, there are some good ones. Knowing the pros and cons of debt can help you wisely manage your finances.
Pros
Debt can provide financing for large investments, allowing you to pay for them over time. Examples of "good' debt, according to CNNMoney.com, include financing for a home or education expenses. Home prices have fallen, but the median price of a U.S. home is still a significant sum for most people to come up with -- $182,600 as of July, 2010, according to "BusinessWeek" -- without taking on some debt. Meanwhile, the yearly cost of a four-year college education is around $7,000 at public colleges and $26,000 at private colleges, according to the College Board.
Smart debt management can also improve your credit score. That includes timely payments and managing the types of credit accounts you have and how many, according to the Federal Reserve Board.
Cons
The two types of debt, secured and unsecured, pose different cons. Secured debt is tied to collateral such as a home or car. If you do not make payments, the bank that financed them will repossess them.
Unsecured debt such as credit-card debt, requires vigilant management to avoid ending up in a negative financial spiral that can be hard to break. That includes paying off your bills monthly, if possible, or you will pay interest and might wind up owing more than you can afford.
Considerations
Before you take on debt, research whether it is worth the risk. For example, if you want to take a home equity loan to improve your house, make sure you invest in projects that will pay off on sale of the home. Make sure your budget can handle repaying the debt, and avoid going into debt for everyday purchases or taking on unnecessary debt, for instance, for elective surgery.
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