3 Golden Rules to Avoid the Debt Trap

To avoid debt don’t get a loan – simple isn’t it? But, is it really that simple?

Sometimes we can’t avoid having to borrow otherwise how are we to get our new home? Not many of us would have the cash to buy it outright. But what you need to understand is that there is good debt and there is bad debt.

So what is good debt? Good debt is for things that appreciate in value such as property, or a successful business. It has the potential to bring in an income or to increase your earning capacity (such as a loan for education).

Bad debt on the other hand would be a credit card that is never paid in full each month. Remember that expensive new restaurant you tried for that special night out? The night out has long gone, the food consumed and the wine drunk. If the credit card has not been paid in full that dinner has probably doubled in price and the interest is now what’s causing the heartbu
and headache. • The golden rule then is to only borrow for things that appreciate in value. Know the difference between good debt and bad debt.

What about a car loan? Is this good or bad? Well, generally you should save to buy a car but if transport is essential (and not just a desire) sometimes you may need to borrow. But make sure it’s the smallest amount possible as a motor vehicle depreciates as soon as it’s driven off the lot. And it’s so easy to end up owing more than the car is worth. Better still get a cheap car that will get you from A-B and SAVE for an upgrade. • Golden rule two – always pay your credit card in full each month. Only place thing on your credit card that you know you can pay for when the bill comes in.

Do you really need the latest technical gadget? These days you will find that electronics almost always depreciate in value. So why would you go out and use a credit card to buy an expensive electronic gadget when it will lose its value after it’s purchased? My laptop cost nearly $6000 a few years ago and now looks outdated, is slow and doesn’t do half the things I could now get for $1500. Luckily I didn’t borrow for the purchase – I might still be paying it off and feeling quite sick!

Shop at the sales – most people love to get a bargain. But don’t get carried away by buying something that’s too small (you’re going to lose weight, yeah right!) and ill fitting or something that you wouldn’t even consider buying normally at full price. That bargain may end up forever with the price tag hanging off, and that’s not a bargain.

In your budget you should have catered for clothing so stick to the limit you set yourself and don’t load up the credit card. • Golden rule three – set up a budget and allow for savings, emergencies, tithing, bills and spending (that means entertainment too). Know where your money is going and be in charge.

It’s easy to get into a cycle of debt. Credit cards never seem to reduce when you pay only the minimum – the payment often covers the interest with barely much more. And interest on credit cards is one of the highest you can get.

Used wisely credit cards will save you money but used as an endless source of spending and cash you will find yourself on the debt merry-go-round. Credit card companies and banks will continue to thrive while many consumers get further into debt.

Be a wise credit card user, and always pay the account in full on, or before, due date. And never spend more than you earn and use the three golden rules.