The Three Step Approach to Honing Healthy Debt Management Skills
Contributed by Kris Olds
Debt Management Skill is knowing the difference between good and bad.
Of all the financial skills in the world, debt management skills will probably take a consumer the farthest. Debt, in and of itself, isn't a bad thing. There are even some debts that are considered "good debts". So what's the difference between the two? And what does this have to do with debt management skills? Well, from a money management perspective, good debt refers to debt associated with items that will increase in value, like a house or an education.
There are also some tax advantages related to some debt. Any debt that brings along with it a break in taxes sounds like a good plan. On the other hand, bad debt is usually identified by high interest loans, like credit cards. Another characteristic of bad debt is debt that has no long term value, like debt that is from a vacation or from eating dinner out at restaurants.
Debt Management Skill means never having to say you're sorry
Knowing good versus bad debt is the first step in having healthy debt management skills. The second skill is knowing how pay off debt. At the very least, paying the minimums on all debt is the way to go. Whereas this won't negatively affect a credit rating and will maintain a head-above-water mentality, it won't get a consumer to an end goal of being debt free. The better approach is to pay off debt as quickly as possible.
In regards to credit card debt, transferring balances to low interest credit cards, taking out a home equity loan and paying off high interest cards may ease a consumer out of the bad debt realm. But it will take more than just taking out more loans or transferring debt around. There has to be a commitment to paying the debt completely off. This may mean having to live on a tighter budget or reallocating some assets.
