The Importance Of Debt Management
Credit is the ability to borrow money
to buy something now with a promise
to pay for it later, with an added
interest charge. Every time you use
credit, you incur debt.
Debt is a double-edged sword.
Responsible borrowers can use debt to
pay for a vehicle, home or college education
over time rather than all at once. Those who
are careless with debt, however, will see
an increasing portion of their income
consumed by debt payments, jeopardizing
their financial futures.
| Good Debt |
Bad Debt |
- Used to buy something that will increase
in value.
- Interest is tax deductible for federal income
tax purposes.
- Finances something that will be used for a
long period of time.
|
- Used to buy something that will decrease
in value.
- Non-deductible interest.
- Used to purchase luxury items.
- Finances something that is enjoyed only
temporarily.
|
Debt Categories
Sound debt management begins with understanding your financing options.
There are two major categories of debt — secured and unsecured.
- Secured debts are those that require you to pledge collateral to
back up your promise to pay. Collateral is something of value which
lenders can repossess if you fail to make payments on their terms.
- Unsecured debts have no collateral, only the promise you give
them to repay the loan in full.
Typically, the property being purchased with the loan serves as collateral,
such as a vehicle or home. Because secured debt exposes the lender to less risk,
it usually has lower interest rates than unsecured debt.
Used properly, credit helps you achieve major financial goals.
Topics covered in this section are:
|
Basic Money Management
Basic Money Management