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Editor’s note: This is a guest post by Ed O’Brien, A specialist on Personal Finance topics
The reality about consumer debt is that most consumers do live with some level of debt. In order to maintain good credit and effectively repair your credit, you actually have to have some debts on your record. But there is a difference between good debts and bad debts. Understanding the difference is a good first step toward establishing better credit.
Your Good Debts
Basically, good debts encompass all the items you need but can not pay for in cash without completely using up all of your assets and investments.
These debts would include your mortgage, car notes, and student loans. It is this debt that keeps your credit score on good ground. With regular monthly, on-time payments, your credit score will benefit and continue to increase. Good debts are also considered by your ability to pay off the debt in a reasonable time period as they continue to boost your credit score.
Your Bad Debts
These are the debts you rack up for items you do not need and certainly can not afford. These debts may include your credit card purchases you can not pay off in full each month, vacations, and personal loans that have high interest rates used for things that do not add value to your life. Payday loans also fall into this category because they can lead you into a bad cycle of ongoing debts you can not afford to pay.
Plan of Action
In order to get your credit in a better place, it is important to establish a plan of action for eliminating as much of your bad debts as possible. The plan of action should start with a method for living below your means. This typically involves creating a budget where you make daily expense cuts so you have more money to put towards debt elimination.You will have to make some temporary sacrifices to find money or you may need a supplemental income like a second job in order to find enough cash for eliminating debts as fast as you can. The sacrifices you make to live within your means may evolve into long-term cuts once you find you can live without some of the things you once thought you ‘needed’.
Wants & Needs
Much like good debt and bad debt, another reason so many of us carry bad debt is because we can not distinguish between our wants and needs. You may ‘want’ a brand new car every three years but it makes more financial sense when you realize you ‘need’ to drive your current vehicle as long as possible to save the costs of ongoing auto loans. You may even need to make a list of guidelines for yourself between wants and needs. For instance, you need food but you don’t need to go out to eat five nights a week.You should also commit to establishing a waiting period when items catch your eye. Impulse buying is one of the reasons people are quick to rack up bad debts. Impulse buying is what occurs when you see something you just ‘have to have’. In reality, you likely do not need the item or have the ability to spend your cash on it. If you really want something, you should start a plan to save for it and wait a period of time before the purchase. If you still want the item after a week or even a month and have saved extra cash for the purchase, then go ahead and buy it using straight cash.
Credit Cards Are Not Income
A hard lesson people have trouble learning is that credit cards are not a source of income. They are one of the most convenient ways to add bad debt to your financial life. It is better to keep credit cards for small purchases you can afford to pay off, in full, each month. Doing so can increase your credit score but when used unwisely, credit cards can be the primary reason people fall into bad debt cycles.Credit repair and maintaining good debts is an ongoing process that you should take an active part in managing. It is possible to get better credit scores provided you are willing to stop spending and start leaving below the income means you have.
About the Author: Ed O’Brien is an expert writer in personal finance, specializing in credit repair. You can find more of his article on his blog CreditRepair.org.
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