Is there any kind of debt that's good to use? Or should I always stay out of debt? Never get a credit card or take out a loan?
I've always heard that you should take out a loan or get a credit card, just so there's something on your credit report...that is, someone with no credit history might get as bad a credit rating as someone with a bad credit history.
Is that still true?
Not all debt is bad. Some debt probably can't be avoided. Also, utilizing some debt establishes a credit rating which is necessary these days.
Using credit card debt is not necessarily bad. If you use them responsibly, (by having a plan to either pay it off entirely each month, or, have a plan to pay off in a reasonable amount of time to minimize finance charges) they might be a good use of funds.
Also, buying a vehicle or home might only be achievable by taking out debt. Not that many people can pay cash for vehicle(s) and/or homes.
I agree with @LudwigVan_fan - not all debt is bad and you just need to use it responsibly.
My advice is to make sure you find out what the interest rate is and what the terms of the loan/ credit cards are.
The interest rate is usually called an "APR" - annual percentage rate. This site has a good explanation of what that is and why it matters. Essentially it's what you're going to pay to borrow money.
Here's a quick example:
The loan or credit card has an APR of 15%.
You borrow $100.
At the end of the term (1 year in this example), you'd owe the original $100 plus $15 for $115 total.
That extra $15 comes from the original $100 multiplied by 15% (or 0.15 - another way to write 15%).
That's a very simple example and most loans and credit cards charge compound interest - where interest is multiplied by the new balance each term. This kind of interest, compound interest, can grow VERY QUICKLY!
So be sure you know the interest rate, aka: APR, and the terms - how often the interest is charged.
This is also a decent intro video to the idea.
It's a personal choice. I gave up all credit cards about 8 years ago, and have never been happier or more at peace since. In that time I've managed to pay off two cars. Having replaced one of those cars 4 years ago with a brand new 2013 Rogue that I paid cash for means I still own two cars free and clear. Also in that 8 years I"ve managed to pay off 1 of the three rentals I have mortgages on. Was great when the insurance company sent me a yearly insurance bill with a 10% increase and I was able to tell them "stick it where the sun don't shine" which promptly resulted in a 20% decrease in that bill.
With only my primary residence and 2 more rentals left to pay off (which is going faster with the rental income from the paid off rental and the fact I have no car payments or credit card payments) I'm looking at being debt free in the next 5 years or so.
I'm tired of working for money and just handing it over with exorbitant interest to lenders. I don't have a problem with paying my share of taxes. But if I'm going to pay taxes on the money my earn, I want to pay taxes on the money I "KEEP", and not the money that is spent before I've even cashed the paycheck.
Should I always stay out of debt? If you are alive you will incur some type of debt. Key thing is to be responsible.
Never get a credit card or take out a loan? While it's certainly possible to do so, you won't have a good credit mix on your report. Creditors use this info to see how responsible you are worth OTHER PEOPLE'S MONEY. If you demonstrate responsible behavior, they will consider you a GOOD risk and won't hesitate to lend you money.
Debt is necessary. However the amount of interest you pay is totally up to you. The creditors set the APR, however your payments dictate how much interest you actually pay.
According to how this works, all credit card debt is bad. The understanding used to be that carrying debt and not paying off the balance is bad. Now it's how much you spend. I pay my card off in full every month. If I spend more than 3500 of the 7000 max, my credit score dips 50 points and then the months where my spending is 1500 or less, I get it back. You would think they would want you to spend as they make roughly 2 % on each purchase.
Your credit score is factored off of how much of your credit balance you use. You want to carry a balance of less than 15% of your CC availability to get the best rating out of it that you can. So don’t spend you limit and make minimum payments that actually hurts your credit.
You only pay interest on your balance! So if you spend $50 on gas for the month in your CC but pay it off before your bill is due, you don’t accrue interest and you use your CC which is good for your credit.
Vehicle loans can also help build credit but you shouldn’t run out and buy a $20,000 car with a $20,000 loan. Save 70% of the car you want and then finance the remaining 30% it will help you have smaller monthly payments and help you pay it off faster and still have equity in the car. This will also help your credit. I’m 27 and have a 760 credit score because I pay off my credit cards every month and am never late on payments
(1) never get a credit card
Explain rationale of #1 when one of the criteria for getting to excellent is Revolving (credit) debt.