Personal Finance Advice

You may have heard the terms good debt and bad debt and may have wondered exactly what they mean.  Isn’t all debt bad by definition because it obligates future income? Shouldn’t we try to avoid all debt at all costs?

The terms good and bad debt don’t really insinuate that one type of debt is great while one is lousy.  Most financial experts agree that a debt-free personal financial situation should be the ultimate goal of most consumers.  On the other hand, there are some instances where taking on debt may actually work to your benefit in the long run, and this is when it is considered good instead of bad.

For example, you have probably heard that a mortgage is considered to be good debt.  That’s not just because it puts a roof over your head, but also for a couple of other reasons:

1.  The home is usually expected to appreciate in value.

2.  The interest you pay on the mortgage loan is oftentimes tax deductible.

So even though a borrower winds up paying quite a bit of money in interest on a mortgage loan, the debt is still considered to be good debt. 

The same can be said for student loans.  Even though most people wind up paying their student loans off over a long period of time and also pay a great deal in interest, it’s still considered good debt because the return on the investment of education is supposed to pay off several times over.  In some cases, the interest paid is also tax deductible.

So what is bad debt? Debt is considered bad if it’s the result of a purchase that isn’t expected to appreciate in value.  Car loans are considered bad debt because cars almost always depreciate the second you drive them off the lot.  Credit card debt is also considered bad debt because all it does is sit and accumulate more interest that will eventually have to be paid off. 

The interesting thing about this, however, is that you can turn bad debt into good debt by consolidating it into an home equity loan or an equity line of credit, or by consolidating it with a cash-out mortgage refinance.  Use caution when using the equity in your home for consolidating bad debt.  You don’t want to lose your home to foreclosure from not paying an equity loan that consists mainly of credit card purchases.

There is a lot more to choosing a credit card than finding the lowest interest rate.  Although it’s great to have a credit card with an impressively low interest rate, there are other things you should take into consideration before signing on the dotted line.

Fees.  Some credit card companies offer attractive interest rates but then turn right around and tack a wide variety of costly fees on to the account.  A really low interest rate becomes a lot less attractive when you’re also paying annual fees, cash advance fees, and other fees that are ridiculously high. 

Terms and conditions.  How long does the low interest rate last? Sometimes the low interest rate is a teaser rate, meaning it expires after a preset amount of time and you’re left with a higher interest rate than you expected.  You should also pay attention to how long the grace period is from when you make a purchase to when interest is charged. 

Rewards programs.  If you use your credit card frequently you might want to find a credit card that offers rewards because this will allow you to earn points toward travel, merchandise, cash back, or some other reward.  Reward cards sometimes come with a higher interest rate, but if the rewards program is phenomenal then it may be worth it.

Available credit.  Make sure that the credit card you’re applying for will offer you the kind of available credit you need.  If you just need an emergency card then you don’t need a huge available balance, but if you’re trying to do a balance transfer from a higher interest card then you’ll need to make sure that you can get the available credit you need.

Acceptance.  Not all credit cards are created equal.  There are some stores that won’t accept certain credit cards, so don’t apply for a card that you won’t be able to use at the places you frequent.  For example, both American Express and Discover cardholders may occasionally run into situations where they can’t use their cards, although this is happening less and less and these cards become accepted more by merchants.

Don’t choose a card just because it has a cute picture on it or because an organization you’re affiliated with endorses the card.  Always read the terms and conditions before applying so you can be sure that you’re getting the best credit card available to you.

Tipping is nice.  It’s a great way to demonstrate to someone working a service job that you appreciate the extra effort they put into assisting you in a cordial manner, and since in many cases the people working these jobs make very low hourly wages you probably already know that tipping is pretty much expected.  What do you do when you’re watching your money very closely though? Should you give less tip money for the sake of your personal finances, or is this one area where you should always give generously regardless of how much money you have in your wallet?

The answer to this question is relatively simple: If you’re desperately trying to get your finances in order then you probably shouldn’t go out to eat so much that tipping really becomes a financial issue.  Of course, there are always exceptions since some people have no choice but to indulge in meals for social networking or other reasons.  If you’re having trouble making end meet, however, whether or not to tip the barista who makes your daily mocha latte should be the least of your concerns.

You shouldn’t use concern for your personal finances as justification on scrimping with tips.  Instead, avoid situations when tips will be expected.  If you must go out to eat or utilize valet parking, consider the tip as part of the expense and budget accordingly. 

Whether or not you tip a rude attendant or snooty server is more of a personal decision and less of a financial one, but rest assured that most people in the service industry expect a tip, so not leaving one is making quite a statement.  Do you want to be the person making that particular statement?

One more thing about tipping: Avoid putting tips on your credit card if at all possible.  It’s easy enough to just add an amount on the Tip Line when signing your credit card receipt, but unless you pay your credit card balance in full each month it means that you’ve just financed a tip and will probably pay interest on it.  It’s better to leave the tip in cash and be done with it.

We won’t even go into why you shouldn’t be financing restaurant meals with a credit card because that’s another topic altogether.