Death and taxes. Inevitable facts of life, right? What if I were to add debt to that famous duo? Death, taxes, and debt. It may not have the same ring to it, but for most of us, debt is just as sure a thing.

But is all debt bad? Sure, we’ve all made some bad financial decisions. Maybe you’ve recovered from yours, or maybe you’re still paying off that tropical getaway charged to your Visa. Or regretting that brand-new car smell you had to have instead of hitting up the used car section.

The thing about that new car is that it depreciates and loses its charm over time. Unlike debt. It arguably never has charm and it definitely does not depreciate. It’s the gift that keeps on giving. Or as Charles Stross put it: “Only debt is forever.”

It sounds almost romantic, doesn’t it? But as with romance, there’s a good way and a bad way to go about debt. Let’s start with the good way.

Good Debt

If you use debt correctly, you can increase your income and net worth and not break the bank.

Education

Probably nothing else is engrained in us as much when we’re growing up as the value of a good education.

A university education in the US is not cheap. And you don’t have to look far to see that student debt is growing fast in our country. However, if you’re going to have debt, let it be for something that’s worth it in the long run and does actually keep on giving:

• A Georgetown University study found that the difference in earnings between a college grad and a high school grad can reach 1 million dollars over a lifetime. We can safely say that college grads typically earn more over their lifetime than high school grads.

• Student loans normally have low interest rates, especially federal student loans

Mortgage

Hands down this is one of the scariest and largest purchases you’ll ever make. Financial implications and numbers aside, it’s where you will live and create memories. I walk into my backyard and see countless barbecues and birthday parties already. And I’m a relatively new homeowner. I can’t even begin to imagine the memories my house will hold ten or fifteen years down the line.

And while I still may be paying the mortgage on my house, it is good debt.

• A home, be it a condo, house, or even a rental property that someone will call home, is an investment that will potentially appreciate in value over time. Be in debt now so your initial investment is worth more later.

• Also, mortgage interest rates tend to be lower than interest rates for other types of debt.

Small business loans

Maybe you dream about opening up your own business. A small business is a risky venture, but if it goes well, it can drastically increase your future earnings.

Unless you have a rich uncle, however, you’ll likely need some assistance getting started. Good news!

• SBA loans typically have lower down payments and interest rates, and flexible overhead requirements.

• Get informed about all the available options for small business owners and entrepreneurs before making a decision.

Those forms of debt that can give you more money in the long run. But as I’ve said before, not all debt is created equal.

Bad Debt

The common denominator with debt from student loans, mortgages, and small businesses is the return those investments can give you.

Your student education will hopefully help you get more and better employment opportunities.

Your mortgage will give you real estate whose value increases over time.

Your small business loan will ideally lead to a successful business.

Let’s flip the coin now to bad debt. You have nothing to show for bad debt except for the fact that you’ve spent a significant amount of money. These types of debt typically carry high interest rates, making it hard for the borrower to pay back in a timely manner. Remember that tropical getaway that you put on your Visa? You’re not the only one.

Credit card debt

This is probably the most common form of bad debt in the United States.

With an average APR at 16.86% and average balance of $6,348, credit card debt is never kind to consumers. In fact, in 2018 alone, Americans paid 13% more in credit card interest and fees than in 2017.

Have I thrown out enough scary numbers to get your attention? Let me clarify that credit cards are not a bad thing. Many have great points and rewards programs that enable us to fly with points, get gift cards to restaurants and stores, and even get discounts and credit towards hotels and lodging. (Do you see there are other ways to get that tropical getaway?)

The key is to keep yourself from carrying a balance. That’s when interest gets charged and things get ugly. If you’d like to take advantage of the perks to wine and dine, shop, and travel (and who wouldn’t . . .), pay your statement balance off in full every month.

Payday loans

If you thought credit cards were bad, meet the devil himself. Payday loans have exceptionally high interest rates. A typical two-week payday loan will charge $15 for every $100 borrowed. This is like having an APR of 400%. Enough said. Avoid these if you can.

Auto loans

We all love the new car smell, but the truth is that as soon as you drive your new car off the dealership parking lot, it has lost value. Well, okay, unless it’s a collectible. I love old collectible cars, but if you’re like me, chances are you just gawk at them on the freeway when they hum past you and that’s as far as it goes.

We know cars are a depreciating asset, but if you live in California, chances are you need a car. You’ve got to drive to work, take your kids to school, mutter something under your breath at the guy who just cut you off . . . yep, that’s life. So, what can we do?

• If you have a good credit score, interest rates on a new vehicle are relatively low. Those rates will increase for a used car, but they’re still lower than most credit cards out there.

• Make sure you don’t purchase a vehicle that’s going to take you 6 or 7 years to pay off. You’ll end up paying more interest and you may end up owing more than what the car is worth. Think simple and practical.

Enduring, powerful, and feared by many. I’m talking about debt here, friends. It is a fact of life but it doesn’t have to control your life. Know the difference between good and bad debt and make the most out of your credit card. Even if you’ve made bad money decisions in the past, it’s never too late to change your habits.

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• Improve your credit score

Excessive credit card debt can put a hold to anyone’s finances. At the worst of times, you may be forced to put your life on hold. At the best of times, it’s an annoying thorn in your side. It can be a costly problem above all. There are many ways to pay off credit card debt. The question is how to pay off credit card debt without going broke. It’s not easy, but it is possible to do it and save money.

It can be done in several different ways. Each method requires you to be resourceful and smart about your spending, and there’s a good chance that success could improve your credit. In the following sections, I’ll outline a few tips to help you save money when you pay off your credit cards.

The Debt Avalanche Method

The debt avalanche method prioritizes paying off high-interest debt. It can cover multiple credit card accounts. If successful, you can minimize interest costs and pay off debt in a shorter time frame. It’s a very popular tactic.

First, list out the balance, minimum monthly payment, and interest rate of each outstanding credit card account. Make sure to list them in order of highest to lowest interest rate. Next, start adding up the minimum payments for a total minimum payment amount for each month across all accounts. With this number in mind, take a look at your personal budget and figure out how much extra you can pay on your credit card debt. Try to come up with as much as you can, but don’t overextend yourself.

Moving forward, you would pay the minimum on each credit card account. With that extra money from your budget, you would make a larger payment on the credit card at the top of the list with the highest interest rate. After paying that account off, you would repeat the procedure with the next highest-interest credit card. By prioritizing high-interest debt, you minimize the impact of capitalization across multiple credit card accounts. This saves you money!

The Debt Snowball Method

The debt snowball method is basically a counterpart to the avalanche method, but there’s a key difference. It prioritizes paying off low-balance debt as opposed to high-interest debt. Some people argue about whether this saves more money than the avalanche method, but it still might be helpful depending on your budget.

The snowball method is implemented in the same way as the avalanche method. However, you would put the account with the lowest balance at the top of the list. Any extra money you have is devoted to paying off the credit card with the lowest balance. After it’s paid off, you would repeat with the next lowest-balance credit card. Some people prefer this method because it can knock out a low-balance account quickly. Then you don’t have to worry about it moving forward.

Balance Transfers

It may sound crazy that saving money on credit card debt involves opening up another credit card, but it can make sense for individuals with great credit. A balance transfer credit card is a special product that allows you to transfer old credit card debt to a new account. This account comes with a low- or no-APR introductory deal. After transferring a balance, you have a window where interest capitalizes at a lower rate. This makes it easier to pay off the debt. Paying off your debt sooner and the lower interest rate should help you save money.

There are certain credit cards that are specifically designed for balance transfers. These cards may have a period of 0 percent APR for 6 to 18 months. The main incentive is to transfer as much of your debt as possible onto this card and pay it off within the promotional period. It’s important to pay off your debt before the deal is up. If you can’t do this, then you’ll be stuck paying interest again on the balance. A balance transfer is most effective if you can eliminate your debt wholesale (or most of it) within the introductory period.

Consolidate Your Debt

Some consumers can save money if they choose to consolidate credit card debt with a personal loan. You can pay off all credit card balances with a debt consolidation loan. Then you are left with installment loan debt and regular monthly payments at a new interest rate. If you can get a rate reduction, then you should save money at the end of repayment – so long as you don’t miss any payments. If you succeed with this, then you may also build up your credit.

However, there are a few caveats. Only borrowers with good to excellent credit have a better chance at getting a lower interest rate. Second, you need to remember that your debt doesn’t just disappear after consolidating. You’re on the hook for installment debt. If you can’t pay this off, then you may find yourself in a worse situation at the end of the day.

Make Weekly Payments

Most of us pay credit card bills once each month, but consider making smaller payments on a weekly basis instead. There are a couple of reasons for doing this. If you check out your bill each week, then you’re less likely to mess up and miss a payment. There is also less room for interest to capitalize which should save money. Paying weekly also gives you the chance to keep a closer eye on your budget; you might even learn a thing or two about your spending habits.

Put Lump Sums to Work

If you get a lump sum of cash (like a tax refund), then you may want to put that towards your credit card debt. It may be tempting to spend that extra cash on something fun, but you will get more long-term value from paying down debt. If you can put more cash towards your balance, then you’ll stand to save on interest costs down the road. If you’re loaded with credit card debt, then you should plan to knock off a chunk of it whenever you get a cash windfall.

Negotiate Lower Rates

Believe it or not, some credit card companies will negotiate and lower interest rates. If you’ve been making your payments on time for a long time, then you might be able to reduce your rate. You may have to speak with several people before this happens, but it’s not as uncommon as you may think.

If you don’t have a great history of making on-time payments, this might not be an option. You can revisit this idea from time to time, but it shouldn’t be something to bank on. There’s no guarantee even if you have a great track record.

Build your Credit from Scratch

Think of your credit like your financial resume. And whether you’re applying for a new house, car or just a new cell phone plan, experience is the most important thing.

While that simple fact puts a lot of pressure on your financial past, the good news is that if you’re starting from scratch, building credit doesn’t have to be complicated. And improving your credit doesn’t have to be a headache either. Take some simple steps now so that a globe-trotting vacation or low insurance rate becomes more than just a pipe dream.

1. Get a credit card

I know what you’re thinking. I want a good credit card, but that’s impossible with no credit. Actually, banks and credit unions have options just for you.

Secured credit cards require a cash deposit as collateral, but are great options for credit newbies. Try to find one that reports to all three credit agencies and that doesn’t charge an annual fee.

A cosigner on a credit card can increase your chances of qualifying for one. Talk to your family members and see if someone will back you. Keep in mind that person will be responsible for paying the balance if you don’t.

Become an authorized user on someone else’s credit card. As with a cosigner, he or she will be responsible for the balance, but there is less pressure on you to open up your own card.

2. Take out a loan.

Again, I know what you’re thinking. I’m one step ahead of you.

Credit builder loans from credit unions are designed for people wanting to build their credit. The money lent to you is placed into an account where you can’t touch it until you’ve paid it back. Traditional loans give you the money up front, but with credit builder loans, they give you the money at the end of the loan term.

Student loans do have one benefit aside from facilitating our higher education: they build our credit. And with over 44 million Americans dealing with student debt, it’s good to know an added bonus exists.

Car loans are another great alternative if you make those timely car payments every month. Granted, paying in cash will save you on interest, but it won’t build your credit.

3. Pay your rent and utilities on time.

Services like RentTrack and PayYourRent report your timely rent payments to the three credit agencies to help you build your credit. (In some cases, landlords will report this information, but if they don’t, these services are available.)

Also ask your utility companies if they can report your payments, too.

What else should I know?

• Any account needs to stay open for at least six months in order for you to have a credit score.

• Don’t confuse a credit score with a credit report. A credit report is a list of your financial history that is used to determine your credit score.

Your credit is important! Even if you don’t have any current plans to buy a house or a car, you won’t be able to make up for lost time as quickly as you may like. A few easy steps now will make a difference in the future.

Improve Your Credit Score

True or false: Your income influences your credit score.

I know what some of you are thinking. A lender looks at your income to see how much you can borrow, but that’s another story. What about that three-digit score?

False. Your income doesn’t influence your credit score.

If you answered differently, you’re not alone. In fact, many Americans don’t quite understand what factors determine their credit score and how to improve it.

What most of us do know is that a high credit score helps us get lower interest rates, avoid deposits on utilities and cell phones, and obtain faster approval on new loans and rentals. All of us can understand those benefits, so let’s explore how to enjoy them, shall we?

Important Steps to Raise Your Credit Score

1.  Reduce Credit Card Debt
Do you have a high credit limit? That’s great, but not as great if your credit card balance is also high. Combine all your credit card balances and compare them to your combined credit limit. It should be at 30% or less.

Are your balances high right now? That’s okay! Work on getting them down and your credit score can quickly reflect those efforts.

2.  Pay Bills on Time

This is a big factor. We’re not just talking about your credit card payments, but all your bills. While not all of them are reflected on your credit report, they will be if they’re not paid on time. That department store card that you only use at Christmas? The fine from your local library? Don’t let those seemingly insignificant charges get the best of you. All it takes is one late payment to drop your score.

3.  Keep Old Credit Cards Open
You don’t use that credit card anymore, so you may think it’s best to close it. Think again! If you close a credit card, over time it will be removed from your credit report, which will reduce your credit age. (Being old in credit years is a good thing!) Lenders want to see experience with managing credit, and the older your credit age is, the more experienced you are.

Also keep in mind that if you close a credit card, you’ll reduce your available credit. Remember that 30% figure I gave in tip #1? If you close a credit card with a credit of $3,000, you’re reducing your credit limit by $3,000. Keep it open and you’ll have more wiggle room with your credit card balances.

This same principle applies to old debt. Think about that car or house you finally paid off. Just because you paid it off doesn’t mean you want it off your credit report.

4.  Keep those Credit Inquiries to a Minimum
This doesn’t mean your checking your credit will hurt your score. That’s considered a “soft inquiry.” A “hard inquiry” is made by a potential lender because you’re applying for credit. A couple of them won’t hurt you, but more than that in a short period of time could cost you points.

The good news? Inquiries are erased from your credit report after 24 months.

5.  Keep an Eye on your Credit Report

I could probably write a whole other blog about identity theft, but most of us know how rampant it is. What’s even scarier is that you may be a victim and not even know it. And what’s worse, you may not even experience the consequences until years later when a collections agency starts calling you for something you know you never opened.

So how do I check my credit?

You can request a free copy of your credit report from each of three major credit reporting agencies – Equifax®, Experian®, and TransUnion® – once each year at AnnualCreditReport.com or call toll-free 1-877-322-8228. You’re also entitled to see your credit report within 60 days of being denied credit, or if you’re on welfare, unemployed, or your report is inaccurate. It’s smart to request a credit report from each of the three credit reporting agencies and to review them carefully, as each one may contain inconsistent information or inaccuracies. If you spot an error, request a dispute form from the agency within 30 days of receiving your report.

If you have a credit card, you most likely have access to your credit score for free.

Even if you’re not looking to open a line of credit right now, you can take steps to ensure you’re set for when that day comes. At the very least, protect yourself against identity theft by staying up to date. It’s free and relatively easy and the truth is, you can’t afford not to do it.