You may have heard that there are good debts and bad debts. I respectfully disagree. While it’s nearly impossible for most people to buy a house without getting credit, doing so still puts you in a sort of “bondage” to your mortgage company.
Then, there’s purchasing a car on credit, using a line of credit and the worst….shopping with credit cards. The interest rates are based on your credit worthiness but in some cases, interest rates are set. So, no matter how great your credit, unless you’re getting a 0% APR Introductory rate, buying anything on credit puts you at risk. Some risks are higher than others but getting out of debt should be everyone’s primary goal. And here’s why:
5 Reasons to Get Out of Debt
- It severely limits your ability to build an emergency fund
- Your credit worthiness is always at risk. (Ex: should you lose your source of employment, debt is the last thing you’ll be able to pay).
- The money you are paying toward your debts could be applied toward your retirement account
- Even a small amount of debt can keep you in “bondage” to paying your debtor for a long period of time (ex; $500 of credit card debt paid back at a 9% APR (with the minimum payment calculated at 1% of balance + interest) calculated will take you 39 months to pay back at a minimum payment of $15, costing you $77.56 in interest (Calculate YOUR true cost using Bankrate’s Credit Card Calculator)
- Having debt lowers your net worth
Still think debt is a good idea? OK. Maybe not good but tolerable?
What do you think? Sound off in the comments section.
Next Up: We’ll discuss building your emergency fund on auto-pilot. Stay tuned!