All currencies are not created equally. There are some currencies that are more valuable and desirable to own than others. For example, the Colombian Peso is more valuable than the Venezuelan Bolivar; the US Dollar is more valuable than the Colombia Peso, the European Euro is more valuable than the US Dollar; the British Pound is more valuable than the Euro; and the Kuwait Dollar is king of all currencies and ranks #1 as the world’s most expensive currency in 2018. To see the Top 20 Currencies in the world click here.
Just like currency, all debt is not created equally. There is some debt that is worth having and some debt that is not. There is good debt and bad debt.
The difference between good debt and bad debt is simple. Good debt can be used to increase your income or cash flow. The type of good debt includes a loan to purchase an investment property, a business loan, and student loan debt (more on student loan debt later). If managed properly, good debt can be used to purchase assets and create income that adds to your overall wealth and net worth. Your net worth is calculated by simply taking the value of everything you own and subtracting the value of everything you owe.
Bad debt doesn’t create income or add to your net worth. Bad debt is a liability that diminishes your cash and reduces your net worth.
Too high a car payment can be a bad debt especially if you can find cheaper transportation that gets you from point A to point B without sacrificing inconvenience.
The worst kind of bad debt is credit card debt. Credit cards will cause you to create bad spending habits, slowly eat away at your cash flow, prevent you from saving and investing, and eventually make you a slave by keeping you in debt.
Credit Cards
Credit cards are debt on steroids as these often charge the highest interest rates when compared to auto loans, mortgages, and student loan debt. Although credit card debt is unsecured, meaning you don’t have to put up collateral to ensure the lender is repaid if you default, not making your credit card payments in a timely manner or defaulting on your credit card entirely will severely punish your credit score making it difficult in the future to gain access to credit or making any credit granted very costly.
Nonetheless, having at least one credit card is practical when it is used as a tool to build your credit history. To build your credit history and credit score, always pay your bill in a timely manner and try to keep from carrying a balance. Strive to pay off anything you borrow before the end of the payment period so that you are not charged interest. If you must carry a balance, make sure that your credit utilization is no more than 30 percent of your credit limit. For example, if you have a credit card with a credit limit of $10,000 you should not utilize more than $3,000 of your credit capacity. Along with timely payments, this will improve your credit score and show that you are a borrower that can be trusted.
Low Interest, No Annual Fee, and Reward Points
When you apply for a credit make sure you are getting a good deal. This means receiving a credit card with a competitive interest rate, no annual fee, and one that allows you to collect points. When you are looking for a credit card don’t just respond to the advertisements that come in the mail. These will often have the highest interest rates and will not allow you to accumulate points. Instead, be an active and informed shopper by doing your research.
How To Find The Best Credit Cards
You can find a low-interest credit card or a rewards card by going to a website like Credit Karma. You can also apply for a low-interest card by becoming a member of a credit union. Credit Unions often offer credit cards with lower interest rates.
If you have a credit card with a high interest rate, call the bank and ask if they would consider lowering your rate. Tell them if they refuse to lower your interest rate you will transfer your balance to another card. Even if they do lower your rate, you can still lower your payment and save on accrued interest by doing a balance transfer to a credit card that pays 0% interest during the promotion period that usually runs 3 months from account opening.
A rewards card will give you points that you accumulate and use for other purchases. There are some rewards cards where your points can be used for purchasing airline miles, hotel stays, paying your mortgage, and purchasing items on Amazon. Find a rewards card that suits your interest. When used wisely, and with discipline by paying the full balance owed each month, rewards cards can help you save money.
Again, there is good debt and bad debt. Make sure you know the difference. Good debt can help increase your income and your net worth. Bad debt will diminish your cash flow and decrease your net worth. Don’t allow compound interest to work against you.