Not all Debt is Equal

Good Debt vs Bad DebtAll one has to do these days is open the newspaper or pop on their tablet to see a steady stream of media reports and headlines about interest rates and debt. While, truthfully, many of the stats and figures presented in these reports are enough to make the average shopper’s eyes glaze over and divert attention elsewhere (anywhere!), it is worth taking in some of the news behind the headlines and understanding them in context of your own financial situation.

Why Should I Care About Interest Rates?

Coupled with reports of rising levels of household debt are numerous warnings from politicians and policy makers about an eventual rise in interest rates.  Interest rates have been near historically low levels for an extended period of time, which creates a false sense of borrowing comfort for some.  It is a well-known fact that an interest rate hike is not a matter of if; it is a matter of when.

What does that mean for my Household?

The problem for some borrowers is if they are stretched too thin, even a small fluctuation in interest rates could be enough to push them over the borrowing brink. The good news is that borrowers can take advantage of the low rate environment to stress test their debt load against their monthly budgets and to see what life would be like with a hike in interest rates and potentially higher payments.  Can you still make payments comfortably? Does your financial picture still look rosy?

If not, now is the time to do something about it, while the choice is still yours to make.

Good Debt vs. Bad Debt

While borrowing often gets a bad rap, there is a distinct difference between good debt and bad debt.

Typically, good debt is classified as debt that is either secured (i.e. a mortgage) against an asset that is likely to increase in value, or as installment credit with a purpose, with set payments that work towards the reduction of a debt (i.e. a consolidation debt).

Bad credit is associated with open credit (i.e. credit cards, particularly department store cards etc. that bear high interest rates).

Given the low interest rate environment, for borrowers who qualify, now is a good time to leverage good debt. Home renovations for homeowners with sufficient equity in their homes, even small jobs, are an excellent way to increase the asset value of your home.

Save or Borrow?

While it would seem an obvious choice to pay cash for everything that you can, sometimes it can make better financial sense to borrow, especially when it contributes to equilibrium between savings and spending.

If an emergency arises (car repairs, broken furnace etc.) and it would mean draining your savings to pay for it, and there is an opportunity to finance it cheaply and effectively, sometimes that is a better option. It is really about judgement, and about knowing how both choices fit into your financial picture.

Change your “Buy Now, Pay Later” Attitude

There is no doubt that we live in a culture of immediacy, where social media and technology have granted us a great deal of convenience, but also have raised our expectations in terms of time. We have everything else we want right now, why not our purchases too? The credit machine in our culture too, is designed to meet that expectation for immediacy and people are less likely to save up for a purchase.

Sometimes, your biggest ally in getting your financial house in order is simply patience and faith that small steps today add up to a healthy balance sheet in the future.