Tackling What You Owe: Getting a Financial Education

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What would you do if you had no debt? Would you buy a new house? Take a great vacation? Boost your retirement savings? Hopefully, you'll eventually have to answer that question for yourself because your debt will disappear and you'll have money to put toward your financial goals. Getting from here to there won't be easy, but you can do it.

To make sure you succeed, we encourage you not only to deal with your debt head-on, but also to become the smartest money manager you can be. After all, when you get to the other side of your debt problems, you never want to return.

The difference between good debt and bad debt

Considering that you have serious problems with debt, you may be surprised to hear this: We eventually want you to use credit cards and get loans again. Why on earth would we steer you back into debt when getting out of it is such hard work? Because owing money to creditors is not necessarily a bad thing.

Whether debt is good or bad depends on why you took on the debt in the first place and how you manage it — whether you make your payments on time, for example. It also depends on how much debt you have relative to your income, because too much debt, even if you're able to keep up with your payments, harms your credit history and brings down your credit score.

Why debt can be a good thing

Going into debt can be a good thing, in many circumstances. For example, you could go to your grave trying to save up enough money to purchase a home with cash, so a mortgage is a wonderful thing — especially if the value of your home grows over time. Also, a home equity loan is a good financial tool when you use it to improve or maintain your home (again, with the goal of increasing its value).

A car loan is another example of good debt because most of us need a vehicle to get to and from work, and most of us can't afford to purchase a car with cash. Debt is also good when it helps you build your wealth; for example, you borrow money to purchase your home or rental property. Some debt helps you save money in the long run, like getting a loan to make your home more energy efficient so you can reduce your energy bills.

When debt isn't so good

Debt is detrimental to your finances when you run up your credit card balances to live beyond your means or to purchase goods and services that don't have any lasting value for you or your family. For example, restaurant meals, happy hour drinks, clothing, jewelry, and body care services don't have any lasting value, but they sure can run up your credit card balances.

Debt is also a negative thing when you have so much that you can't afford to repay it (especially when your home is at risk), when the amount you owe lowers your credit score, or when you borrow money from shady operators (like finance companies or payday loan companies) that charge high interest rates.

Distinguishing between types of credit

You may think that all credit is created equal. A lot of people think so, which is one of many reasons they run into debt problems. In this section, we brief you about various types of credit. They definitely aren't created equal, and you should get familiar with these terms so you can become a better credit consumer.