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About Credit Debt
One of the subtle ways people get into trouble is by only
looking at what their monthly minimum payment will be. They see
a number and think, "I can easily pay that amount each month."
For major purchases such as a home or a car, this
is a useful approach since it will allow you to buy something right
now that you'd have to save for years or even decades to afford if
you were paying cash.
But for most other types of purchases, this way of
thinking ignores a very crucial factor, namely the cost of ongoing
interest that accumulates. In other words, you end up paying interest on your
interest. This is an even bigger problem when credit card debt is
high and emergency situations arise.
Weren't you counting on that extra 'cushion' of credit to handle these?
And because of this, it also pays to work on increasing your credit
score.
Credit Score
You probably already know that your credit score is
a crucial number that lenders use for determining someone's credit
worthiness.
One simple rule for increasing your credit score
that will serve you well is to never max out your credit. Yes, it's
easier said than done, but having a higher credit score will serve
you better in the long run. The secret lies in knowing the rules
that credit card companies and other lenders use when evaluating
someone's credit worthiness.
One of the most important (and least known) of
these rules is that if your total balance on a revolving line of
credit (credit card, store card, gas card, etc.) is more than 30% of
your maximum credit line, you're seen as a greater risk. And this
affects your credit rating, which in turn affects your ability to
borrow money cheaply. Always remember your credit rating is crucial
for getting a handle on your finances.
Debt
While there are purchases that make sense to go into debt for, there
are many that don't. A good example of this is people taking out
second mortgages or even third mortgages on their homes to pay for
vacations, expensive 'toys' like boats and additional cars, etc.
The total cost of the purchase gets multiplied
because of the interest payments. This practice originally began
with businesses in the industrial age when they needed funds to pay
for factory equipment. It made sense to borrow the money because if
they were successful they'd make much more on what they produced
than it cost to finance the debt.
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