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[BUSINESS] Good Debt vs. Bad Debt

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  • madchinaman
    Good debt vs. bad debt Sometimes it makes sense to borrow -- but a lot of times it doesn t. http://money.cnn.com/pf/101/lessons/9/page1.html It s almost
    Message 1 of 1 , Jan 1 4:47 AM
      Good debt vs. bad debt
      Sometimes it makes sense to borrow -- but a lot of times it doesn't.
      http://money.cnn.com/pf/101/lessons/9/page1.html


      It's almost impossible to live debt-free; most of us can't pay cash
      for our homes or our children's college education. But too many of us
      let debt get out of hand.

      Ideally, experts say, your total monthly long-term debt payments,
      including your mortgage and credit cards, should not exceed 36
      percent of your gross monthly income. That's one factor mortgage
      bankers consider when assessing the creditworthiness of a potential
      borrower.

      It's far too easy to spend more than you can afford, especially when
      you pay by credit card. The average U.S. household with at least one
      credit card carries nearly a $9,200 balance, according to
      CardWeb.com, and personal bankruptcies have hit record highs in
      recent years.


      Of course, avoiding debt at any cost is not smart, either, if it
      means depleting your cash reserves for emergencies. The challenge is
      learning how to judge which debt makes sense and which does not, and
      then wisely managing the money you do borrow.

      Good debt includes anything you need but can't afford to pay for up
      front without wiping out cash reserves or liquidating all your
      investments. In cases where debt makes sense, only take loans for
      which you can afford the monthly payments.

      Bad debt includes debt you've taken on for things you don't need and
      can't afford (that trip to Bora Bora, for instance). The worst form
      of debt is credit card debt, since it usually carries the highest
      interest rates.

      Sometimes the decision to borrow doesn't hinge on how much cash you
      have, but on whether there are ways to make your money work harder
      for you. If interest rates are low, compare what you'll spend in
      interest on a loan versus what your money could earn if it were
      invested. If you think you can get a higher return from investing
      your cash than what you'll pay in interest on a loan, borrowing a
      small amount at a low rate may make sense.
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