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Debt

How to tell if Debt is Good or Bad

We often hear things about good and bad debt. We think that we are okay to have good debt but we should not have bad debt. However, it is not always that easy to tell the difference between good and bad debt, so how do we decide?

Some debt is very easy to classify. If you decide to use a student loan to go to university, then this would be considered good debt as the repayments are means tested, then you only have to pay it back when you can afford to. The debt is also written off after thirty years. If you use an unauthorised overdraft to buy a new mobile phone, when you already have one that works and you do not think about the cost of the borrowing, just about getting the phone, then this would be bad debt.

The problem with most types of debt is that it is not really easy to classify whether it is good debt or bad debt. There are so many types of borrowing and so many circumstances when you borrow that there is not just one set of good and one set of bad debt.

It is always important to think hard about debt before you use it. Make sure that you consider whether you really need to borrow the money; whether what you are spending on is really necessary or whether you can wait until you can save up or until you next get paid before buying it. Then you need to consider which type of loan you need. There are lots of different ways to borrow money and you need to make sure that you are using the best one for the amount of money and the purpose that you are borrowing. Once you have considered this, then you need to compare different lenders and see which one can give you a loan at the best rate. You also need to think about which lender you think offers the best service as well as the best price so that you get the best value for money. Lastly, you need to think about the repayments. Consider what you can afford in the way of repayments and whether the loan that you have chosen is affordable for you. If you are not sure whether you will be able to manage the repayments then take a look at previous bank statements and specifically what you tend to earn and what you tend to spend in a month and see whether there will be enough left over to repay the loan. If you have a credit card or store card, then you may think that you will not need to worry about this however you will need to pay it back eventually and the longer you leave it, the more expensive it will be. If you think hard about all of these things then it is more likely that you will be taking on good debt.

It is easy to think that the main difference between good and bad debt can be what you are using the money for. Perhaps good debt would be a mortgage to buy a house and bad debt an overdraft to buy some jewellery. However, things are never quite that straight forward. We never buy things without good reason and so we need to think about why we need the items and whether we can justify the expense of borrowing money to pay for them. Whether we can or not will very much depend on how much of a risk taker we are and our general attitude towards money. We will need to weigh up the pros and cons and think about whether we personally feel that borrowing is the right decision for us.

Really, as long as it has been a decision that we have considered carefully, we can afford the repayments and we understand the consequences of it, then it could be considered to be good debt. If we are spending without considering the consequences and not really thinking about what we are buying and why we are buying it, then this is bad debt. It can be difficult still to decide, so it can often be wise to discuss your decision with friends and family to see what they would do in that situation.

Tips

Tips on Managing if you are Tight for Money

At the moment there are many people struggling financially. Many people have not had a pay rise for a long time and with prices rising, it means that there is less and less spare money. You may feel that you have tried everything that there is to manage in times like this and just feel that an economic boom and a pay rise is the only answer. However, you may find that there are other things that you can do yourself to help, rather than relying on the economy picking up, which could be a long wait.

It is worth addressing this problem in two directions. Make sure that you are getting paid as much as you can and that you are not overspending unnecessarily. Getting paid more is the area which can be more difficult. It is not always possible to ask for more pay or to work more hours but there are a few other options which could appeal to you. Selling items that you own is an option for some people. If you have a lot of things that you no longer want or need, then you can consider selling them so that you can make some extra money. Although this will not give you a regular income it could help you out of a tight spot, perhaps help towards the cost of repaying a loan or pay some bills. It can be a good thing to do as well, because you will see how much less you get for items when you are selling them and so if you have not got a lot of use out of them, then it may make you think harder about whether you want to buy the items in the first place.

Another way to make some extra money is to do some extra work outside of your normal job. Some people may be happy to take on a second job, but many people find that this is not possible or not something that they would like to do. If this is the case for you then you will need to think about what you might like to do, whether you want to apply for a standard evening or weekend job, whether you want to do freelance work from home, start a business or something else. There are lots of opportunities available, it is just a matter of finding one that suits you, your skills and the time that you have available.

It is also wise to cut back with your spending as much as you can as well. To start with it is good to compare the prices of the things that you are buying to see whether you can get them cheaper elsewhere. Use comparison websites for utilities, banking, insurance and supermarkets and you will be able to see whether you can just spend a little bit of time doing some research and maybe a few phone calls and you could end up saving money without doing very much at all. It is useful though to also see whether there are any things that you can stop buying which could help you to save money as well. Consider things like subscriptions, clothing, shoes & accessories, household goods, evenings out, take away food and holidays. It can be difficult cutting back on things that we enjoy, but if you need some extra money then you will need to find a way to cut back and luxuries are the area where you can do this without suffering so much.

It is worth setting a goal with regards to your finances. Think about what you want to achieve with your financial situation. Actually calculate some figures, perhaps how much extra you want to earn, how much less you want to spend or both. Then you will have something to aim for. Also note down the reasons that you want to do this so that you can use this for motivation whenever you feel that it is too difficult for you to manage.

There is a lot that you can do to change your financial situation. It will mean that you will have to make changes though and you will need to be prepared to do this. It could mean that you will have to put in more hours of work or that you will need to go without buying so many things. It can be tough but it is worth it if you feel more relaxed with regards to your finances afterwards.

Credit Cards

Should you use your Savings to Pay off your Credit Card?

Many of us really like having some savings behind us. We like the feeling of security that we have some money there in case we need it. However, if we owe money on a credit card then we will be being charged interest on it and so this could be expensive.

It can seem simple. If you use savings to pay off a credit card, then you will not be paying the interest on the card and you will save money in the long run. You will also no longer have a debt hanging over your head and you will be able to relax without worrying about that. However, some people have a different attitude towards debt and would rather pay for the debt and have some savings as well. This is because they either have not calculated the cost of doing this or they are happy to pay the extra so that they can keep the savings.

It is worth giving it a bit of extra thought though. Consider that the credit card could be used to fall back on if you need money in an emergency and if you pay off the debt with your savings you will be saving money every month by not paying interest on the credit card. It is worth calculating how much you will be paying each month and then adding that up over the course of a year. Then you should add up how much you will get paid in interest on your savings and it should enable you to work out which will be the cheapest option for you. It is worth calculating it for the long term as a months’ worth of interest may seem very small but if you add it up over the course of a year you will see how much it could potentially cost you if you do not pay it off and this could influence you to change your mind and want to pay it off.

If you have been working hard saving up, it can be difficult to use the money. You may have been saving up for something specific such as a holiday or to treat yourself to something and using the money to pay off a credit card, perhaps when you used it to buy things you cannot even remember buying, it can be very difficult. It is perfectly understandable that you might be reluctant to use this money for any purpose apart from what you saved up for. It is a very personal decision as well, as to whether you are happy to use that money to save you the cost of interest in the long term or whether you would rather keep it for the purpose that you saved it up for an use it for that. Common sense and logic may say one thing, but emotion will say something else and not everyone would agree on which the right decision would be to make in this situation.

If you want to make sure that you are as good with your finances as possible, then it is wise to make sure that you try to make decisions based on maths rather than emotion. However, it is not always easy for us to do that. We will often be tempted to buy things, perhaps because we want to gift other people, treat our family or feel that it will not be available again and so it is easy to spend more than we have. Sometimes this is because the marketing is just too good, but it could also be because we like the feeling of being able to give to others or feel that we deserve a treat because we have worked hard. It is always worth thinking hard about our motivation behind the decisions we make when we buy things. Some are obvious, such as paying our electric bill so that we do not get cut off, but others can be a lot more complex. It can be worth thinking through things more, if you find that you are spending too much on your credit card, so that you know whether it is better for you to avoid making that purchase and avoid the debt or whether you are happy getting the debt because you really need or want the purchase.