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Financial independence,
step 4: Be smart about credit, debt
Bankrate.com
Credit and debt have different images, and most folks
think of them as separate entities. Credit signifies fun things,
like buying and shopping. Debt has a negative connotation, referring
to bills and paying something back.
However, it's important not to lose sight of the fact
that a fine line divides credit from debt. Essentially, credit is
the ability to go into debt.
Credit and debt are part of our modern world, and
they serve a useful purpose. But it is vital that you control your
credit and debt, and not let them control you. Getting out from
under the burden of loans and bills will free you from living paycheck
to paycheck and from worry over paying bills. It will allow you
to regain control of your credit and other finances, and open the
door to other financial opportunities.
How to gain control of your credit and debt:
If your indebtedness has control of you, it's
time to turn the tables. Make independence a goal. Yes, this may
take time. And no, it's not as much fun as profligate spending.
Find a financial plan that fits
your life and pay off your debts as quickly as possible. Seek credit
counseling if necessary. Paying a minimum balance leaves you shackled
to your debt for years to come. Until you take control of your debt
situation, you are handing over control of your life to others.
- Make wise choices when taking on debt.
Once you have debt under control, you can make choices.
Learn to distinguish between different types of debt and understand
their potential dangers.
Consumer debt is what we use to go shopping and it's
the dangerous stuff. While we may appreciate the momentary joy a
new credit line brings, remember that you are taking out a loan
to pay for these purchases.
The higher the interest rate and the longer you carry
a balance, the more expensive your new purchases become. If you
carry a hefty balance and are only paying the minimum, consider
that after adding accumulated finance charges to the original price,
you probably could have bought two or more of each item.
The wiser move is to use consumer credit and debt
as an accessory, and not a crutch. That means not relying on your
credit cards, but using them wisely and sparingly.
Extreme independence
One option that may seem extreme (yet truly responsible) is to stop
using credit cards completely. If you don't have the cash to make
a purchase, then you can't afford it. A credit card or two can be
useful for reserving hotels or rental cars, but you don't need more
than that. Because credit is the ability to go into debt, too many
open lines of credit, even unused, can damage your financial profile.
Despite this drastic picture of debt as shackles upon
your life, it does have a useful purpose. Debt that gains you something
of value, such as a house or an education, is generally worthwhile.
Real estate generally increases or holds its value, and an education
is an investment in future earnings potential.
Ironically, the kind of debt that pays off has lower
interest rates than consumer debt -- because it is collateralized.
So not only do you get something for the indebtedness, it's just
plain cheaper to borrow for.
The key to financial independence is freedom and control.
Remember, using your credit wisely is the best investment in your
life. Once you've got your money under control, then you can put
it to work for you in Step
5.
Updated:
June 13, 2002
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