Know which part of your debt you can eliminate

June 29, 2008

Know which part of your debt you can eliminate

Debt is like cholesterol. It can clog your financial arteries.

Maybe that's why you feel as if you're about to have a heart attack when you open your monthly credit card statement.

But all cholesterol is not bad. There's actually good cholesterol, which, in effect, works to undo the work of its evil cousin.

Believe it or not, there's good debt, too.

For instance, taking out a mortgage at a low interest rate to buy a home you can afford is a no-brainer. You gain a property, and the interest is tax deductible. What's not to like?

Hefty balances on credit cards top the bad debt list, especially for consumers who make only the minimum payments. Interest rates are typically high, sometimes topping 20 percent, so you can wind up paying for that great vacation twice -- or even three times. You can't deduct the interest from your taxes, so it's truly money down the drain.

If you own a home and have a nice chunk of equity, taking out a low-interest home equity loan (in this instance, a good debt) is a sensible way to pay off your credit cards (the bad debt.) Here's the rub. You can only roll out this strategy once or twice before you put your property at risk, turning that home equity loan from a good debt to a bad debt.

The solution isn't always easy to implement but it sure is simple. Stop charging. Use your credit card only in dire emergencies, such as unexpected car repairs. Getting a tan, going to dinner or buying designer shoes on sale are not emergencies...."

Source

http://www.courierpostonline.com/apps/pbcs.dll/article?AID=/20080629/COLUMNISTS15/806290367/1003/business