Managing Debt and Credit
To make smart decisions about borrowing and protect your credit score, it's important to understand how to manage your debt and make it work for you.
The best type of debt has low, fixed interest rates and potential tax advantages. But as with all debt, avoid taking on more than you can comfortably repay, and be sure you fully understand the terms of your loan before you sign up. If you have to take on debt, we recommend that you consider these options:
- Mortgages and home equity lines of credit (HELOC) allow you to deduct the interest on mortgage debt of up to $1 million on your primary and secondary residence, whether the loan is for a purchase or for improvements.
You can also deduct interest on up to $100,000 of a home equity line of credit, for any purpose. Be sure to check with your tax advisor, as the alternative minimum tax may apply.
- Student loans offer comparatively low rates, and the interest may be tax-deductible.
For most people, debt is what allows us to purchase a home, buy a car, or help pay for a child's education. However, certain types of debt can be detrimental, so you should generally try to avoid them.
- Debt that carries high interest rates (such as credit cards) and results in your paying significantly more than the original purchase price
- Debt that is used to purchase a depreciating asset (such as a car), in which case you're immediately losing money on your purchase
What you can do now:
- Learn more about smart borrowing.
Withdrawals from an IRA or qualified retirement plan prior to age 59½ may be subject to a 10% federal tax penalty on earnings.
The information provided is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.