It's not always bad news if you owe some money - there may be benefits in borrowing.
Owe money, pay money. Getting stuck in debt is a situation that strikes fear in many people. It can derail life goals, wreck relationships, and be a huge mental strain.
But the reality is this: Not all debts are bad. It simply depends on what kind of money is being owed. For instance, where paying off university fees or housing loans in full can be a huge stretch, borrowing money can come in handy.
Even if you have a personal need that warrants taking up a credit card or credit line loan, do ensure that you make the required payment every month to avoid deterioration in your credit score. On the other hand, making prompt payments or paying in full upon utilising your card can help boost your credit score with the credit bureau. This is a clear signal to the financial institutions of your credit reliability.
Getting into any debt causes a ripple effect. You can either be overwhelmed by a tsunami of bad debt, or enjoy a rich river of dividends from your borrowings (provided you pay it back). Be strategic about debt, and you can make it work to your advantage.
When borrowing money is a good thing
While it might make the most financial sense, it is not necessarily smart to live debt-free. Would you forsake a good education or a comfortable home just because you cannot afford to pay it off at once?
Incurring good debt can be seen as an investment that will pay off in the long run. For example, taking a student loan for your university education is a good reason to owe some money. Getting a university degree equates to better job opportunities and higher potential income.
Taking a home loan is also another example of good debt. Besides securing a good home, the money you currently have can be freed up for other purposes - investments, opening a business, or starting a family. The price of your property may also appreciate, which can hopefully cover the interest rates of your home loan.
Short term pain, long term gain - as long as you reap more than what you borrow, you are on the right path.
The bad debt quagmire
There are some types of debt that you should avoid.
Failing to pay on time for your credit card bills is one of them. All banks impose late payment charges if you fail to meet the minimum payment by the due date on your monthly statements. The late payment charges will be added to your outstanding debt, incurring interest charges by the next statement date. In addition, the late payment will also be recorded with the credit bureau and can eventually hurt your credit score.
Late payments can result in a higher interest charge to your account for the next few months until a prompt payment is made, after which there will be a reversion to the usual interest rate. Such penalties may seem marginal, but they can have great impact if your outstanding is significant. A handy tip to avoid missing your monthly dues at all costs is to arrange for payment reminders with your bank.
Formulate a strategic game plan
One way to avoid bad debt is to fastidiously keep track of your spending. It will allow you to put the brakes immediately.
Also, have a game plan when paying off student or housing loans. Set a fixed duration to pay off what you owe - it can be five, 10 or even 20 years. Then work your monthly expenditure around that.
Be strategic about your debts, and you will find that borrowing can work to your advantage.