In some corners of the personal financial advice world, getting into debt is just about the worst thing you can do. And yes, some forms of debt — especially those with high interest rates — can keep you in a money-debt cycle for years.
Still, there are times when taking on debt serves a purpose in your overall financial picture. Debt isn’t always bad, although there’s always a risk that you’ll get over it. It is simply a tool that you can use to pay for a very large purchase without losing your savings.
“I think it’s so important that people don’t fear debt, but instead see it as something you can take advantage of,” said Kara Duckworth, a certified financial planner and director of customer experience at Mercer Advisors.
Here are a few examples of when the ability to borrow money can come in handy.
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For something that can increase in value
Debt is often categorized as good or bad, depending on why you borrow money and how much you pay in interest.
“Good debt can help you move forward with your career and life,” says Mark Reyes, a certified financial planner and senior financial assistance manager at Albert’s financial services app. “On the other hand, bad debt can keep you from achieving your goals.”
Mortgages are often cited as an example of good debt because a house can increase in value. “That’s not a bad debt to have; it gives you a roof over your head,” said Bill Hampton, a certified financial education instructor and CEO of Hampton Tax and Financial Services in Atlanta. If you borrow more than you can afford or if you don’t understand the terms of the loan, this can of course involve financial risks.
Student loans are another widely accepted example of good debt because your education can increase your lifetime earning potential. According to Hampton, “You’ll be in debt for several years, but it’ll get you a better-paying job. But if your major doesn’t support your debt, it can hold you back.”
To finance a large purchase
Now for the bad debt: credit cards. Not only do they charge high interest rates, but you can continue to make purchases on them, even if you still owe money from previous months. It’s easy to end up with a balance that keeps growing no matter how much you try to get rid of it.
However, some credit cards offer interest-free promotions that you can use for a large purchase. These promotions allow you to spread the cost over many months, often 12 months or longer, depending on the card. However, make sure your budget allows you to pay it off in the time frame of the promotion – before the interest kicks in.
If you have existing debt, balance transfer cards allow you to transfer that debt and not pay interest for months. But as always, make sure you understand the terms of the card you’re using – you’ll likely pay a transfer fee and the interest will rise again once the promotion ends.
Once you own a home, you can borrow money at its value in the form of a home equity loan or home equity line of credit — or HELOC — to free up money for home renovations. Homeowners can choose to do this instead of charging renovation costs on a credit card with a higher interest rate.
“Depending on how much equity a person has and depending on their particular situation, it may be better to take advantage of that than a credit card or personal loan,” Reyes says. “It’s kind of the lesser of two evils.”
To endure unexpected costs
You’ve heard the lecture before. You must have emergency savings. But that’s the problem with emergencies – they happen randomly and sometimes at the same time, whether or not you’ve been able to save extra cash.
These are the times when you may need to make the best, less optimal decision, and that could mean going into debt. HELOCs and personal loans can be a cheaper way to borrow money to cover an emergency, but credit cards can also serve as a backup source for emergency financing.
If an emergency expense leaves you in credit card debt, Hampton recommends making a plan to pay that balance over a few paychecks. You can also take other actions to reduce the cost of your debt, such as moving the debt to a balance transfer card or seeing if your credit card company meets you halfway.
“Consider calling your credit card company and trying to negotiate a lower interest rate than what you’re being charged,” Reyes says. “It’s not always successful and it’s not likely, but it’s worth a try.”
This article was written by NerdWallet and originally published by The Associated Press.