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The smart ways to go into debt

Not all debt is created equal -- sometimes it actually makes good financial sense.

By Jul 22, 2014 12:06PM
This post comes from Gerri Detweiler at partner site on MSN MoneyYou’ve been warned about the evils of debt, and there is plenty to be wary of. But debt isn't always bad.

Shopping online © Creatas, SuperStock“There’s a difference between good debt and bad debt,” says attorney Garrett Sutton, founder of “Bad debt takes things out of your pocket; good debt puts money in your pocket.” For example, he says if you leverage a loan to buy an apartment building, you can benefit from appreciation and depreciation while you are paying back the loan, and someday own an income-producing asset free and clear.

Sometimes, though, it's not that clear-cut. Using a credit card to put gas in the car while you look for work may seem like a bad way to go into debt, but whether that proves to be true in the long run depends on how those interviews pan out. And the debt you took on to go back to school to pursue your dream can either feel like the best -- or worst -- decision you ever made.

Here are some guidelines for borrowing when the lines between good debt and bad debt are blurred.

Know the numbers

Planning for debt is better than going in blindly. When you do, here are some helpful numbers to know before you borrow.

1. What will it cost? Planning on pulling out the plastic? Make a list of all your cards and their interest rates. Check with each issuer to see if they offer low-rate balance transfers. Your goal should be to borrow as cheaply as possible.

2. What are your limits? Also know your credit limits on each account as well as your current balances. Your goal should be to try to use no more than 25% of any of your credit limits since balances above that amount may start to hurt your credit scores.

3. How are your scores? It’s also helpful to check your credit scores before you need to borrow. That way you’ll know whether it’s possible to get a low-rate loan, and if there are action steps you can take to improve your credit in advance.

Here are some special situations that may require you to take on debt and how to navigate these scenarios the best you can when ...

If you are unemployed

In the 2014 American Dream survey, 2014 American Dream survey, slightly more than 40% of respondents said they said they had been unemployed at least once in the past three years. Of that group, 28% said they had been unemployed more than once, and 60% said they were out of work for more than a year.

Losing your job can throw your personal economy into a tailspin. If you’re lucky, you may be able to collect unemployment and have some savings to fall back upon while you job hunt. But if those funds don't stretch far enough, you may find yourself turning to credit cards or other loans just to put gas in the tank or food on the table. Getting a loan at anything near a decent rate is going to be nearly impossible if you are unemployed, so in many cases you will have to work with the credit you already have.

If you have a choice, unsecured debt (like credit cards) is preferable to secured debt (such as home equity or a car title loan) because if you have trouble paying the loan back you are less likely to put your collateral (home, car) at risk.

Borrowing may also be preferable to withdrawing money from your retirement accounts. The problem with tapping your retirement funds is that you will often pay taxes as well as an early withdrawal penalty (if you are younger than age 59½). That means right off the bat the IRS gets a good chunk of your retirement savings -- money you’ll likely need when you are no longer working.

If you are starting a business

Launching a business often requires capital and if you don’t have it, you may find yourself looking for a loan. Unfortunately loans for brand new businesses are often very hard to come by. That’s why entrepreneurs may cobble together funding from their personal credit cards, home equity loans, or loans from friends and family.

Mitchell Weiss, a former financial services executive and the author of Business Happens, has more than thirty years of experience in lending. "One of the top five reasons why businesses fail," he says, "is because they didn’t have a liquidity facility in place -- a go-to source of funding -- if business doesn’t ramp up as fast as they expected or there is a seasonality factor that they weren’t aware of."

He goes on to explain, "That could either take the form of a line of credit at a bank, or a credit card with plenty of availability to spare. For small businesses, a consumer credit has far superior consumer protections than business credit cards -- just take care to keep a record of the business-related charges you make and to pay off your balances on time."

Another concern entrepreneurs should keep in mind is their how these loans may affect their own credit ratings. Ask the lender whether these loans will be reported on your personal credit reports, and if so, keep in mind that any debt you accumulate may affect your personal credit scores.

If your family is expanding

A new baby or an aging parent that moves in with you can put a huge strain on your budget, and even more so if you have to take a pay cut in order to take care of them. While caregivers often make huge sacrifices in these situations, it is helpful to try to be as objective as you can about distinguishing between needs and wants.

When my daughter was an infant, I threw money at gadgets and tools that promised to help her sleep better. A soothing music tape? Gotta have it. A special crib mattress designed to be more comfortable? Let’s try it! (I fantasized about a motorized car for my living room that would go around in circles, since the car seemed to help her sleep but didn’t let me rest. I would have gladly gone into debt for something like that.) None of them worked.

But I also wasn’t shy about taking hand-me down clothing from friends and relatives, or shopping at garage sales. Many of the items I acquired had been previously used by other parents and that helped even things out.

When you're in the midst of a major life change, try to borrow cautiously and try to stick to low-rate loans whenever possible. A credit card with a low interest rate may be your safest bet, but the minimum payments can allow you to quickly rack up more debt than you realize. So keep an eye on the three-year payment number on your statement. If that number starts getting too high, you may need to reach out to a credit-counseling agency for a free consultation to see if they can help you develop a budget that works.

If you’re going to college

Whether you are a high school grad heading straight off to university, or someone heading back to school for a degree to enhance your career prospects, student loan debt can seem inevitable. And sometimes it is the only way to get through college. Before you blindly take on debt, however, make sure you educate yourself on how student loans work -- your school probably won’t. Use the “net price calculator” you’ll find on your prospective school’s website to learn more about costs and financial aid. 

And be sure you fill out the Free Application for Federal Student Aid (FAFSA) as soon as possible since some student aid is available on a first-come, first-served basis.

If you can't avoid debt, planning how to manage your debt can reduce your costs and help you avoid unnecessary stress. The key is to know where you stand before you fill out that first application, and then to stay on top of it until it is paid off. One way to get your credit scores is with an account from, where you can get your credit scores for free, then monitor them each month at no charge.

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Jul 22, 2014 1:37PM

No need to go into debt anymore. If you need money, just go ask the federal givernment. They'll take care of you on the backs of the hard-working middle class!

The only ones who need to go into debt are all the American Taxpayers who pay for the freeloaders.  $17T and counting!

Worst congress/administration ever!

Jul 22, 2014 2:13PM
Regardless of how they try and justify it, debt still equals slavery.
Jul 26, 2014 10:34AM
The system is set up that us (the middle class) will always owe. The middle class supports the rich and the poor.  
Jul 22, 2014 3:46PM
Borrowing money on credit cards is a very slippery slope for anyone to be on.  Over the years I have tried virtually every tactic mentioned in this article.  In the process, I have found that the risks involved can give you a coronary.  In a few instances using credit cards worked out well.  In other cases it was really tight.  If, and this is a big "IF", all things were static and there were no unforeseen variable involved, it can - at least theoretically - work out quite well.  However, the odds of everything running smoothly throughout the years you will commit to this action can become quite daunting.  My advice?  Be very, very, very careful and think more than twice before making credit card roulette a practice in your life!
Jul 22, 2014 3:03PM

The three smart things to borrow money for are: Start or buy a business, purchase real estate,  and getting an education.  Three dumb things are: daily living expenses, a home remodels, and weddings.

By the way cars are not on the list. Pay cash for a modest used car, save money (the monthly payment that you are not making) and keep upgrading until you can pay cash for a new car.  The only rub is whether you can happy not driving a new car every three years.

Jul 22, 2014 2:40PM
This is known as the Government Method of spending and the end result is financial ruin. 
Jul 26, 2014 2:54PM
On a slow day in the small town of Pumphandle and the streets are deserted.

Times are tough, everybody is in debt, and everybody is living on credit.
A tourist visiting the area drives through town, stops at the motel,
and lays a $100 bill on the desk saying he wants to inspect the rooms
upstairs to pick one for the night.
As soon as he walks upstairs, the motel owner grabs the bill and runs
next door to pay his debt to the butcher.
(Stay with this..... and pay attention)
The butcher takes the $100 and runs down the street to retire his debt
to the pig farmer.
The pig farmer takes the $100 and heads off to pay his bill to his
supplier, the Co-op.
The guy at the Co-op takes the $100 and runs to pay his debt to the
local prostitute, who has also been facing hard times and has had to
offer her "services" on credit.
The hooker rushes to the hotel and pays off her room bill with the hotel Owner.
The hotel proprietor then places the $100 back on the counter so the
traveler will not suspect anything.

At that moment the traveler comes down the stairs, states that the
rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything. No one earned anything. However, the whole
town now thinks that they are out of debt and there is a false
atmosphere of optimism.


Jul 26, 2014 2:26PM

Don't listen to the lefty lies people:


Plain and simple.

Just saying...


A dis-satisfied customer and voter...

Jul 26, 2014 12:32PM
Do. Not. Buy. "Things". With. Credit.

For thousands of years, humans raised babies without special gadgets.  If you can't afford it, DON'T BUY IT. PERIOD.

Who wrote this article?!

Jul 26, 2014 12:40PM
'doctor,you told me i have a month to live and then you sent me a bill for $1,000!  i can't pay that before the end of the month!'
   'okay,you have six months to live'.

patient:how much to have this tooth pulled?
    dentist:ninety dollars.
    patient:ninety dollars for just a few minutes' work?
    dentist:i can do it slower if you like.

what did the lawyer name his daughter? Sue.
Jul 26, 2014 2:58PM






Jul 26, 2014 2:53PM

 "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. Increasing America's debt weakens us domestically and internationally. Leadership means that, 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."
   ~ Senator Barack H. Obama, March 2006


Jul 26, 2014 9:43PM

Forty years ago I started a one person contracting business.  I too a deposit for materials that got the job started.  I needed food & mortgage money so I took 30 day notes against the job contract.  I generally paid off the note with a small service charge, in a week or two with the second payment on the contract.  I did that until I had a bank account with some money to live on.  When larger jobs came to me I repeated the process to pay suppliers or my new workers.  I bought new trucks on credit when the old one was costing me down time.  When the truck was paid off I refinanced it and put the cash into the business.  I was paying 4.5% and my profit margin was much higher.    My business went on for thirty seven years.  I have retired a while ago and remortgaged my home for thirty years.  We took out the equity to invest and got a lower rate of interest so the monthly payments are lower, too.  As the author said there is good credit and bad credit use.

Jul 27, 2014 1:10AM
The only way good debt can exist is if it is for a good/safe investment.  That investment is to generate/save money at a higher rate than interest.  If that can be accomplished, then you have a good debt.  Examples: Home loan, Education (provided you're choosing a good field), starting a business, etc.

I would say that most things in this article are not good debts.

Also, our POS federal government does not have many good debts..  Since when is going into debt to give handouts to everyone an investment?  How is spending trillions of dollars on a giant military we don't need an investment?
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