Welcome to Ameritrade Plus University
  Controlling debt
 
Introduction
 
Top 10 things
 
The details:
 

Three examples of good debt
 

Borrowing for smaller expenses
 

Taking a loan to pay off credit cards
 

Managing your debt
 

Getting your credit reports
 

Deep debt
 
Glossary
 
Take the test
 
Lessons:
1
  Setting priorities
2
  Making a budget
3
  Basics of banking
4
  Basics of investing
5
  Investing in stocks
6
  Investing in bonds
7
  Buying a home
8
  Investing in mutual funds
9
  Controlling debt
10
  Employee stock options
11
  Saving for college
12
  Kids and money
13
  Planning for retirement
14
  Investing in IPOs
15
  Asset allocation
16
  Hiring financial help
17
  Health insurance
18
  Buying a car
19
  Taxes
20
  Home insurance
21
  Life insurance
22
  Futures and options
23
  Family law
24
  Estate planning
25
  Auto insurance

|> About Money 101

investing 101

  Good debt vs. bad debt
Sometimes it makes sense to borrow. A lot of times it doesn't.

It's almost impossible to live debt-free; most of us can't pay cash for our homes or our children's college educations. But too many of us let debt get out of hand. Ideally, experts say, your total monthly long-term debt payments -- including your mortgage and credit cards -- should not exceed 36 percent of your gross monthly income. That's one factor mortgage bankers consider when assessing the creditworthiness of a potential borrower.

But it is far too easy to spend more than you can afford, especially when you pay by credit card. The average U.S. household with at least one credit card has an $8,523 balance, according to CardWeb.com, and personal bankruptcies have hit record highs in recent years.

Of course, avoiding debt at any cost is not smart either if it means depleting your cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not, and then wisely managing the money you do borrow.

Good debt includes anything you need but can't afford to pay for upfront without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.

Bad debt, on the other hand, includes debt you've taken on for things you don't need and can't afford (that trip to Bora Bora, for instance). The worst form of debt, of course, is credit card debt, since it carries the highest interest rates.

Sometimes the decision to borrow doesn't hinge on how much cash you have but on whether there are ways to make your money work harder for you. If interest rates are low, compare what you'll spend in interest on a loan versus what your money could earn if it were invested. If you think you can get a higher return from investing your cash than what you'll pay in interest on a loan, borrowing a small amount at a low rate may make sense.

Next: Top ten things to know

 

 
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