Are You Using Debt to Your Advantage?

January 15, 2020

Debt. It’s literally a 4-letter word, and too often it feels like one. And there’s good reason for this: across America, household debt has reached a record $13 Trillion. That’s billions more than it was back in 2008!1

Between mortgages, car loans, student loans, and rising medical costs, it’s easy for bills to add up and eventually become a problem. But not all debt is bad. In fact, debt can be a crucial tool for you to achieve certain goals. When you use debt to build a positive credit history, it can open doors to renting apartments, accessing bigger home loans at lower rates, and even some jobs.

So, how do you know if you’re using debt to your advantage or not?

Signs that you’re using debt as a tool to achieve your goals

Using debt to your advantage doesn’t have to be difficult, you could already be using debt in a smart way!

1. You’re building up or repairing your credit score

If you’re seeing a positive trend in your credit score, you’re probably on the right track.

2. You’re in control of your bills

You feel comfortable (if not grumbly about) paying your monthly bills in full on time.

3. Your total debt is less than 40% of your gross income

When what you owe is much less than what you make, it’s a good sign you’re using your debt in a way that benefits you. In fact, your debt-to-income ratio, or DTI, is a big factor in your access to more credit. Learn more about your DTI and what you can do to improve it.

4. You use less than 30% of what you could on your credit cards

If you’re using much less than you could, that can be a good indicator that you’ve got enough income and savings to take care of your monthly expenses. Learn more about credit utilization, and how to improve it. It could help your credit score!

5. You have a rainy-day fund

If you’ve saved enough money to float yourself and your family in case your income takes a hit or expenses go up unexpectedly, that’s a good sign that you’ve got your debt under control, too. A good rule of thumb is to have 3-6 months of expenses set aside.

If all of this describes where you are today, great work! If some or all of the above doesn’t describe your situation, it doesn’t necessarily mean you have a debt problem.

Signs you may have a debt problem

Slipping into debt is never good, but realizing that you have the control to drive yourself into financial freedom is an important step in building debt independence. Do you see any of these two signs on your debt profile?

1. You feel like your finances are out of control

It’s important not to discount the toll that stress can take on your overall well-being, and debt can be a huge source of stress. If you’re not feeling in control, you can take steps to get there.

2. You’re paying interest on your interest

This is what’s called compound interest, and many credit card companies do not distinguish between original debt and interest owed when calculating next month’s interest. If you’re paying extra on your debt because of late or minimum payments, it could indicate a problem. That’s why minimum payments on your credit cards can keep you in debt for years. Check your next card statement to see when you’d be able to pay off your debt.

If this sounds familiar, you’re not alone. Debt may be part of American life, but so is initiative. You can take control of your debt and stop a few unexpected bills from getting worse.

Dive deeper into signs of a debt problem, learn credit basics, and much more in our Resource Center.

 

1. Forbes.com

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