November 23, 2022

Growth and Jobs | Using credit to boost your financial situation | New

GENERALLY, PEOPLE are advised to avoid borrowing as much as possible, especially if it involves high interest payments, as it can negatively impact your net worth and creditworthiness if left unmanaged with caution.

However, Troy Bygrave, business relations and sales manager at JN Bank, says there are many ways borrowing can be beneficial, so avoiding credit at all costs isn’t necessarily the smartest move.

“Credit is there to help you acquire assets to build wealth. Very few people earn enough money to pay cash for life’s most important purchases, such as a house, car or college education. therefore, the loans are there to support that,” Bygrave explained.

The aim is to borrow wisely, he stressed, warning that “borrowing should never be done simply for consumption”.

“You should always consider how you will earn or benefit from the funds you borrow,” he advised.

GOOD AND BAD DEBTS

The most important consideration when buying on credit or taking out a loan is whether the debt incurred is good debt or bad debt.

To better understand the concept of a good loan, he said that the old adage “it takes money to make money” is very applicable in this situation. “Good debt helps you generate income and increases your net worth,” he advised.

Banker JN gave examples of good debt, which include taking out a student loan to pay for college, buying a house, consolidating debt, or starting a business.

“A college education increases your value as an employee and increases your potential future income. In general, the more educated an individual is, the higher their earning potential,” he explained.

He further noted that education has a positive correlation with the ability to find employment; therefore, better-educated workers are more likely to hold well-paying jobs and find it easier to find opportunities as the need arises.

“An investment in a university degree is likely to pay off a few years after the newly trained worker enters the labor market. Over a lifetime, educated workers are likely to accumulate a return on

investments running into the hundreds of thousands of dollars,” he said.

Bygrave further indicated that taking out a mortgage to buy a house is also considered good debt. “A house is generally an asset that appreciates; and, therefore, in most cases, the market value of your home is likely to increase over time, enough to offset the interest you paid during that same period,” he explained. .

He noted that residential real estate can also be used to generate income, by hosting a boarder, renting out part or all of the residence. He added that a car loan can also be good debt, especially if the vehicle is essential to doing business.

“But unlike houses, cars and trucks lose value over time. Therefore, it is in the buyer’s interest to pay as much as possible up front, so as not to overspend on high-interest monthly payments,” he advised.

Taking out a loan to fund a viable small business is also considered good debt, Bygrave advised.

“Making money is the whole point of starting a business. If this business does well, it will end up being worth a lot more than the loan you originally took out,” he said.

Banker JN added that borrowing also helps maintain one’s pool of savings and investments, noting that sometimes it is better to borrow than to dip into those savings or investments.

“Instead of using this money, borrow it; and let that money keep making more money. Therefore, you shouldn’t have to deplete your savings or income in order to acquire an asset, unless you are saving the funds for the specific purpose of making that purchase,” he advised.

AVOID DEBT TRAPS

Debt becomes a real problem, ByGrave advised, when there is no worthwhile purpose for borrowing and no specific, achievable plan is in place to pay off the debt or manage it. For example, he noted that many people incur bad debt when they borrow to buy items that quickly lose value and don’t generate long-term income.

“The general rule of thumb for avoiding bad debt is if you can’t afford it and don’t need it, don’t buy it,” he said.

“If you buy a pair of fancy shoes for $20,000 on your credit card, but you can’t pay the balance on your card, those shoes will end up costing you over $20,000, and because of the pace fast fashion, the value of these shoes, if you chose to sell them to recoup the cost, they probably could have depreciated,” he explained.

Bygrave also noted that credit cards often get a bad rap, but said they can be a good tool. “A credit card is a good loan, if used correctly, because it’s a free loan. If you pay your bill on time and in full, you avoid paying any interest,” he advised.

Also, a person’s ability to handle a credit card properly is a good demonstration of how well they handle credit, should they need a much larger loan, such as a mortgage or business loan. .

“Credit card debt only gets bad when you don’t follow the rules and spend frivolously. One method you can apply when you’re tempted to use a credit card is to ask yourself this question: “If you had the cash on hand to make the same purchase, would you spend your money?” If your answer is no, then maybe you shouldn’t make the purchase,” he said.

Another debt trap people should avoid is borrowing to supplement their income. This leads to a cycle of debt, ByGrave warned.

“Borrowing to supplement your income is not a sustainable measure, and it will lead to an uncontrollable habit that will result in very negative results for you in the long run,” he warned.

Instead, try to think of other ways to supplement your income, such as taking advantage of any skills or knowledge you may have acquired, such as cooking, plumbing, teaching, speech writing, find another job or even tap into any idle assets you may have. , such as fruit trees and plants at home.

editorial@gleanerjm.com