Having debt isn’t always bad, there are times when having debt can actually save you money. This might sound far-fetched, how can any debt be good debt? When you are looking to borrow money for something like a new home, the mortgage company wants to know what interest rate to charge you. To get this information they want to understand what you have been like in the past with your credit, this enables them to judge what you might be like in the future and how much of a risk that you pose.
How to build good debt
To improve your chances of getting the best rate you need to have a great credit score, one that reflects your responsibility to any debt that you have owed.
If you have been great, budgeted your money, and have managed not to incur any debt, then this is great, but it will mean that when you come to apply for credit you won’t have any point of reference for the mortgage company so they will assume a high risk. They have no alternative; this will mean higher interest payments because they will charge you more for the loan to reduce their risk.
Therefore, building a great credit rating will allow you to have the history and this could reduce the interest rates charged.
How to build good debt:
- Apply for a credit card, one that offers you a fantastic deal. There are cards that will pay you back a percentage of the money that you spend on them.
- Use the card each month but only for purchases that you can afford.
- You must pay off the credit card each month on time. Late payment has a bad effect on your credit file.
There are credit cards that you can get that are suitable if you have a bad credit file that will help improve the situation through careful and proper management.
It is important that you don’t apply for cards just to have them, this has a negative impact on your credit file, especially if you are declined. It is possible to see if you might be eligible for the card without fully applying; this allows you to check without affecting your credit rating.
Understanding good debt
It is difficult to comprehend that you need some form of debt to get more debt. However, loan companies are only prepared to take the risk on those people who can prove they are responsible with money. If there is no proof then they are increasing the risk they are taking and with that comes higher prices for the money borrowed, in the form of interest payments.
By having evidence that you are responsible in the forms of previous debt, then this makes the position the loan company is in, easier. They have access to your previous history and if this looks good, then you are able to get more credit at great rates.
You can only have good debt if you have been responsible and paid bills on time and have displayed the correct attitude towards any credit that you might have taken out.
Therefore, it is important that if you are going to look in the future for the possibility of having credit then you might need to act now to ensure that you get the best deals in the future. Whether it is repairing your credit file or just starting out, make sure you choose good debt and understand the details, including the rate of interest payable, of any agreement before you sign the paperwork.