While the word 'debt' is nearly always synonymous with doom and gloom, having a healthy amount of it can actually work to your advantage - we show you how.
Being in debt means that you have borrowed money and are yet to pay it back. Usually interest will be added to this debt so that the amount you pay back is more than you originally borrowed.
Though borrowing money to pay back with interest isn’t something we would choose to do given the choice between that and living a debt-free existence, there are instances in life when borrowing money is beneficial. We explain why getting into debt can sometimes be a good idea.
How can debt be good?
Debt that is money borrowed for good reason, that’s manageable and reasonable, and is paid back responsibly can actually do a world of good for your credit score and for your way of life in general.
Borrowing a manageable amount at a decent rate means that you're able to finance the purchase of something you need or want now that you'd otherwise be unable to afford were you to try and save up for the full amount.
Mortgages
When you take out a mortgage you are effectively investing in your future, even though you are taking out a loan. For this reason it can be used as an example of a good debt because it represents a need for borrowing to fund a 'sensible purchase'.
Not least because saving up enough money to buy a house outright is unrealistic for most people. As such, borrowing an affordable amount at the best rate possible is the only way most of us will be able to get a foot on the property ladder and work towards owning the roof over our head. Because you will, providing you keep up with the repayments, have a house to show for your borrowing once you've paid off your mortgage, taking out a loan for this purpose isn't necessarily a bad idea (providing your finances are in shape).
Credit cards
Some credit card debt can in fact be beneficial as you can use them to spread the cost of a purchase over a number of months interest free, spread the cost of a purchase from one month to the next or even make a little money for yourself.
For example, if you have a cashback credit card you can use it to earn cashback on purchases throughout the month without paying any interest (providing you pay back the balance as soon as you get your statement). Alternatively, if you opt for a card with a lengthily introductory offer on purchases you will be able to spread the cost of a larger buy over a number of months without paying any interest whatsoever on your borrowing. You can even put the money you would have paid upfront in a high interest savings account so you're earning a little extra back.
This process of borrowing and repaying also does wonders for your credit score as well as your wallet.
What's more, there are particular credit cards for those who have a low credit score which enable you to demonstrate your ability to borrow and repay - and are designed to be used specifically for this purpose. By using a ‘bad credit’ credit card to borrow and repay regularly you are demonstrating to creditors that you can handle being granted credit and knowing when to pay it back. This can be useful for rebuilding your credit history in case you need to borrow in the future.
How else can it benefit me?
It’s worth noting that having a small amount of debt in relation to your available credit is likely to be most beneficial for your credit score. For example, you might have a credit card with a £2,000 limit but are only borrowing £100 or so every month then paying it back. This low ratio of debt in relation to available credit shows that you are a responsible borrower because although you have plenty of credit available to you, you are only making use of a small amount.
If you don’t borrow any money, potential creditors have no way of scoring your ability to borrow and repay. As such your credit score will be non-existent, because creditors have nothing to go on. Therefore it is actually better in terms of improving your credit score to borrow a little bit of ‘good debt’ and repay it on time rather than borrow nothing at all.
Of course having a manageable amount of debt isn’t only beneficial for your credit score; it can also benefit you by allowing you financial flexibility when you need it.
Borrowing money for the sake of borrowing and then struggling to pay it back is always going to be damaging to your finances in general and represent ‘bad debt’. However, if you can borrow responsibly, use the funds to pay for something 'concrete' and repay as necessary that debt can actually be transformed into good debt, both as an incredibly helpful asset in the present as well as a benefit to your financial outlook for the future.
How can I sure my debt is good debt?
Before you borrow ask yourself:
- Am I looking to buy something in particular?
- Can I afford it?
- Do I really need it?
- Should I save up for it instead?
- What is the best way for me to borrow the money I need?
- What's the shortest time frame I can repay the debt over?
- Am I borrrowing at the best rate possible?
