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Manage Your Debt and Avoid Money Troubles

"I applied for my first credit card in my late teens. It was a big deal for me since I was pretty sure credit held the power to fulfill my childhood dreams of adventure and freedom... not to mention a fancy new stereo and a super-fast computer.

That first card arrived with a $2,000 limit. Easy money! I soon decided that a mere two grand just wouldn't do, so I applied for another card. And another. At my peak, I had five cards and more than $10,000 in available credit. Not bad for a college kid with two slightly-higher-than-minimum-wage jobs.

Six long years and thousands of dollars later, I finally worked my way out of the hole. I am now free of bad debt (which, for me, excludes student loans) and am back in the black. But it wasn't easy."

Good Debt, Bad Debt

Stories like the one above are not at all unusual. But not all debt is created equal. Some kinds of debt are actually OK:

  • Your mortgage. Your home loan may very well be your biggest debt. But the interest you pay on your mortgage provides you with a tax deduction. Plus, over time you typically build equity in your property, which can be leveraged via a home equity loan or line of credit.
  • Your student loans. Could you have gotten where you are in your career without your degree? Would you be earning what you are today without having gone to college? As burdensome as they can be, your student loans are probably worth every bit of work it takes to repay them. (And student loan interest may also be tax deductible.)

Some debt to minimize:

  • Your auto loan. If you need a car and can't afford to pay cash, you'll need an auto loan. On the bright side, successful repayment of a significant debt like a car loan will help you build a positive credit record. Nonetheless, try to repay your car loan as quickly as your budget allows.
  • Credit card balances. Credit can be a great financial tool, but with interest rates sometimes exceeding 20 percent, be careful how you use it. Typically, credit card debt becomes a problem when it takes you longer than three months to pay off your purchases.

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