In the world of personal finance, debt often gets a bad rap. Financial gurus sometimes say you should avoid borrowing at all costs and pay for everything in cash. It’s not hard to guess why; debt is the No. 1 source of financial stress for millennials, according to a Student Loan Hero survey.
However, debt offers a significant benefit. It can facilitate important financial moves to get you closer to the life you want. When used wisely, debt can open doors by getting you the cash you need to take advantage of today’s opportunities.
Instead of fearing debt, consider how you can make this financial tool work for you. Here are seven moves you can make with your debt or credit in 2018 to add to your bottom line and get closer to accomplishing your goals.
1. Improve your credit
In simple terms, your credit reveals how responsible you are with borrowing and repaying money. This means that any debt you have, from revolving credit to installment loans, can help you build credit and raise your score.
Of course, it’s not wise to borrow solely for the purpose of improving your credit. But if you work to manage your debt well, it can help you work your way up to an excellent credit score.
Setting up automatic payments and due date alerts for your existing debt is an easy way to manage it. Always paying your bills in full and on time is the best thing you can do for your credit. Automating the process and setting up reminders can prevent mistakes that ding your credit.
2. Lower your debt costs
If you have a loan or credit balance that’s costing you way too much, consider replacing it with a cheaper loan. That’s exactly what happens when you refinance or consolidate debt.
Review your debt and check for any accounts on which you’re paying too much interest. For instance, all of the following are popular ways to lower debt costs:
- Consolidate credit card balances with a personal loan
- Refinance high-interest student loans
- Refinance a mortgage
- Refinance an auto loan
This is especially beneficial if your credit score today is better than it was when you first took out the debt. With a better score, you could qualify for lower rates on a new loan.
You’ll also be more likely to save if you’re replacing high-interest debt with a different type of loan that costs less. For example, you might consolidate credit card balances with a personal loan, which typically offers lower rates.
3. Invest in yourself
A great use for debt is to make yourself a more valuable asset. The most obvious way borrowers use debt to invest in themselves is through student loans. These loans make it possible for many people to earn an undergraduate or advanced degree.
Another option? Take out a personal loan to pay for a coding boot camp. It could lead you to a more lucrative career path or a certification that could help you earn a promotion.
Make sure the program you’re borrowing for will lead to a positive return on your investment. Most colleges and some certification programs track how well their students succeed after graduating. Ask for any data that can reveal the jobs and earnings graduates see.
You’ll want to look for high salaries and employment rates among graduates. These can be indicators that you’ll have no problem finding a well-paying job.
4. Start or grow a business
Maybe you already see an opportunity to start a business or grow your side gig. If you want to make your move this year, it’ll probably take some cash to get going.
That’s where a business loan can help. You’ll get access to the capital you need, when you need it.
In fact, a Fundera survey on how small-business owners borrow money found that most did so to grow their business. The top reasons for taking out a business loan were “working capital” (49 percent), “purchasing equipment” (42%), and “expansion” (37%).
With the opportunity to increase your company’s value or generate more income, business loans have the potential for big payoffs.
5. Get rewarded for everyday spending
Get more out of your credit accounts by using your rewards credit cards to their full potential. Review your current cards and see if any have stellar reward offers or programs that might match a coming purchase. It might make sense to start spending more on a travel rewards card, for example, if you’re planning a big vacation this year.
Look at your spending habits, too. Two-thirds of Americans say they make purchases primarily with cash or debit cards, according to a TD Bank
survey. If you fall into that group, using your top rewards cards could be a simple way to get more out of your regular purchases.
Just don’t forget to actually claim your rewards, especially if they expire. You should also pay your credit card balance off in full each month to make sure your rewards aren’t erased by interest charges.
6. Build equity in a home
Buying a home usually means taking on a mortgage and getting into debt. But unlike other debt on depreciating purchases, this type of loan can actually help you build your net worth.
If you buy a home, for instance, your mortgage allows you to pay for a place to live. But it has the dual role of building equity in your home, too. With each payment you send in, you own a little more of your home outright. And any increases in your home’s value after purchase gets added to your equity.
7. Pay for a major life step
It’s a great idea to save up for big life steps, such as getting married, having a child, or moving across state lines. But the truth is, these things don’t always happen at the perfect time or in the way you’d hoped.
Maybe you saved to start a family, for instance, only to face fertility challenges. Instead of the uncomplicated pregnancy and delivery you saved for, you’re paying for pricey fertility treatments or sky-high adoption fees.
Debt can give you the opportunity to take a major life step when you otherwise couldn’t cover the cost.
Always look before you leap into debt
One big caveat: While debt can be a tool to help you achieve your financial or life goals, it should never be taken on lightly.
Consider all your options and make sure you turn to the most affordable forms of debt first. Weigh what you’re using a loan or credit line to pay for. And ask yourself if the value you’d get is worth the debt.
Making informed decisions is key to ensuring your debt is getting you closer to your financial goals, instead of setting you back.