When people think about how debt fits into financial planning goals, it's common to see such liabilities as generally bad things. From the perspective of a financial advisor, though, the goal should be to get to the point where debts are net positives for their clients. Here are four ways you can turn debt from a bad thing into a winner.
Lower the Cost Basis
More than anything, your long-term goal is to get the cost basis of your debt to a number that works well for you. A lot of this is simple math. Paying 4% per year to finance a mortgage, for example, is just better than paying 8%.
How do you lower the cost of debt, though? A financial planning advisor will encourage you to contact your creditors and ask for better terms. Refinancing can and should be an option for anyone who has been a regular payer. Likewise, if your current loan financers won't renegotiate terms, you might get a different company to buy the loan at a better rate.
Use It
Particularly for folks who've fought to get their finances under control, the idea of taking on more debt can seem downright terrifying. However, unused credit ends up being mediocre-to-bad credit in the long run. Businesses want to deal with customers who have long histories of making payments, and the only way to accomplish that goal is to get in the game.
For people with bad credit, this may involve opening a line of credit with a secured card. Most other people, though, should be able to shop for decent rates relative to their credit ratings so they can get rolling.
Pay at the Right Pace
Another potential issue is that some folks pay either too slowly or quickly. Both are bad. Slow credit means someone is behind on bills and frequently incurs fees. That's great for the companies financing the debt because they can rack up fees and interest.
You might think paying quickly would be a good thing. After all, don't the financers get their money sooner? Yes, but they still want to make money financing the debt over time. If someone has a history of paying quickly, that might not help their credit as much as just keeping the normal payment schedule.
Automate Payments
Modern technologies with apps and banking systems make it possible to take money out to pay bills automatically. Enroll in such programs whenever possible. You may even get discounts for doing so.
Share4 February 2021
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