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.

On this page:

What is the difference between good and bad debt?

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 acquired on or before 12/15/17 or up to $750,000 after 12/15/17 on your primary and secondary residence, whether the loan is for a purchase or for improvements.
  • Student loans offer comparatively low rates, and the interest may be tax-deductible.

Types of debt to avoid

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:

3 strategies to deal with debt.

Debt is neither good nor bad; it's simply a tool. Borrowing money can play a crucial role in helping you meet key financial goals, but too much debt can undermine your future.

  • Step

    Understand where your money is going

    Have you ever added up how much you pay each year for "bad" (high-interest-rate, nondeductible) debt? To avoid accumulating such debt, try leaving your credit cards at home or using them only for emergency expenses.

    What you can do now:

     

  • Step

    Pay less interest

    Reducing the amount of interest you pay on your debt can result in significant savings.

    What you can do now:

    • Try to reduce the interest rate on your revolving credit lines. If you have a strong history of on-time payments and a low revolving balance, you might be due for a rate decrease on your credit cards. You might also be able to obtain a lower rate by transferring balances from other credit lines; just be aware of any transfer fees.
    • Pay more than the minimum payment each month to pay off your balance faster and reduce the total interest you'll pay. If you can't afford more than the minimum payment, focus on the account with the highest rate first.
    • Refinance your home or auto loan. If rates are lower today than they were at the time of your purchase, consider refinancing. Just be sure any closing costs can be recouped at the new lower rate.
  • Step

    Pay on time, every time

    Late payments could have a significant negative impact on your credit rating, and lenders might also raise your interest rates if you continue to miss payments.

    What you can do now:

    • Take advantage of payment reminders if your lenders offer them when bills are due.
    • Enroll in automatic debit programs. Many lenders let you set up automatic payments from your checking or savings account—and some offer an interest rate reduction if you do.

5 Tips to Boost Your Credit Score

Your credit score has never been more important. It determines whether or not you can get a loan and how much you'll pay in interest to borrow that money. Many companies are using it as a way to evaluate a prospective employee's level of personal and financial responsibility, too.

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