Smart credit use does not necessarily mean you have to stop putting yourself through debt. Total elimination of debt is something that will really restrict you in terms of financial opportunities. There are certain financial improvements that are easier to achieve if you put yourself through debt. The most popular to this is buying your own home.
Buying a house is one of the most expensive spending that you will ever make. It cost hundreds of thousands of dollars to purchase. This is why most homebuyers can usually afford this purchase if they apply for a mortgage loan.
According to an article published on Reuters.com, the US housing is forecasted to gain steam in 2015. Thanks to the strengthening job market, more and more people are confident to borrow money just so they can buy their own home. This is one way for them to increase their personal net worth. If they wait to save up to buy a house in cash, it will take them forever to do so. In the meantime, they will be wasting their money paying rent. Instead of the monthly rent, it is more logical to just borrow money to buy your own home. The monthly amortization that you pay towards your mortgage increases your home equity. That means you get to increase your personal net worth as you pay off your mortgage loan. That is more preferable compared to the money that you will be wasting making your landlord rich.
But while putting yourself through debt to buy a house is acceptable, do you think the same is true with home improvements? Is it an example of smart credit use to borrow money so you can renovate your home to look at lot better? After all, to increase the value of your home you need to improve it every now and then. If the housing market is forecasted to improve this year and the next, you can really maximize the value of your home by doing a bit of improvement every now and then.
Survey shows that consumers plan to use debt for home improvement
According to a survey published on PRNewsWire.com, 30% of homeowners who plan to improve their home would be using their credit cards. 59% said that they will tap into their savings. But some of the people who plan to use their savings are also thinking of using credit for a portion of their home renovations.
Do you think that these people are practicing smart credit use by borrowing money to improve their home? That probably depends on a couple of factors. If you are one of these people contemplating to borrow money just to renovate your home, look into these factors first.
Why do you want to improve your home?
Start by looking at the purpose of this home renovation. Do you plan to sell your home in the near future? With the improving housing market and the rising value of homes, any improvement that you will make could help you sell your property at a higher price. You can profit more from this transaction than when you leave it as is.
But if you simply want to improve your home because you want to make it more modern, you need to further scrutinize the specific renovations you will make. If the improvements will help insulate your home so you do not have to spend so much on utilities, then it might be justifiable. If you want to make your home more eco friendly and energy efficient, then borrowing may also be justified. But if you only want to increase your living space or improve the aesthetics of your home, then you should ask yourself other questions.
What is the status of your current debts?
This is the next question that you need to ask – what is the current status of your debts? Do you still owe a lot on your mortgage? If you only own a small percentage of your home equity, do you really think it is practicing smart credit use if you add more to that? And what about your credit card debt? How much do you owe your creditors? This is a high interest debt that you still need to pay off. If you want to use your credit card for the home improvement, that would add to the high interest balance that will burden you.
If your current debt is still high, you may want to find ways to keep your home improvements to a minimum. Or you can ask the next question.
Is your source of income stable?
If your income is currently struggling to pay off the debts that you owe, then that is a sign that you cannot take on more credit. Otherwise, it would be very difficult to pay off everything. You might end up really selling your house just because you got too much debt to your name. If ever you still have a lot of debts, you can be justified in borrowing more money as long as your income can still support the additional debt. That is how you practice smart credit use.
If none of the answers to these questions justify borrowing money, then you should postpone it or just save up for it.
Good and bad ways to use credit to improve your life
CNN.com published an article that says it is impossible to live debt-free. Apart from homes, the college education of children is hard to pay for in cash. While it is not impossible, a lot of households cannot afford to put their kids through college without the help of student loans.
While debt is unavoidable, that does not mean we should let it get out of hand. It is all about smart credit use.
One way for you to really implement it is to know the difference between good and bad debt. For those of you who got stung by too much debt during the Great Recession, it might be hard to believe that there is such a thing as good debt.
But there is such a thing as good debt. You need to know the difference between what is a good or a bad debt so you can make the right choices when it comes to your credit.
According to the CNN article, a good debt is something that you really need but cannot afford to pay in cash. At the very least, this is something that you cannot do without liquidating your assets and wiping out your cash reserves. Robert Kiyosaki defines good debt as something that puts money in your pocket. That means, the debt should lead you into a position that allows you to earn more money or increase your assets. This include mortgages, student loans and business debts. These three can help you put more money in your pocket.
Robert Kiyosaki defines bad debt as something that will take money from your pocket. The CNN article identifies it as debt that you took to pay for things that are unnecessary and you cannot afford. These include credit card debts for designer clothes, accessories you can live without or that vacation that was clearly beyond your budget. You need to stay away from these debts because they will not really do you cany good to have. These could even drag you under if you are not careful.
Here is a video that simplifies what good and bad debts are.
In the end, smart credit use is not really about debt elimination. It is taking on debt that is necessary, improves your financial situation and you can afford to pay off.