Four General Rules for Having “Good Debt”

You may think it’s ideal never to be in debt to anyone, but that isn’t necessarily so. Some expenses are definitely worth borrowing for.

In addition, modest debts that you pay off quickly show you can handle credit and give you a better credit rating—you’ll qualify for larger loans at lower rates—than no debts whatsoever.

• Only take loans for critical big-ticket items. A new home, car, major medical expenses or college education are worth the debt. Vacations and impulse buys aren’t. Keep your debt-to-income ratio (monthly debt divided by gross monthly income) lower than 25%, or 45% including mortgage or rent.
• Read the fine print. If it seems too good to be true, it probably is. New credit cards offer low rates for a short time, and then rise sharply to a variable rate. Unless you can pay off balances within that introductory period, pick a card that stays at one rate. And when opening a line of credit, watch out for “inactivity fees” if you don't plan on tapping it right away.
• Pay by the rules. Pay credit card bills as soon as they arrive. Late fees for credit cards average $27, and your Annual Percentage Rate can go up with one or more incidents. Some lenders even raise your rate if you slip up with other creditors. Late payments also lower your credit score. Use an automated bill-payment service to avoid unnecessary charges and simplify your financial life.
• Refinance and consolidate high-rate debt. Lowering your rates is usually worth it in the long run, as long as you don’t incur additional debt. A fixed equity loan or variable-rate home equity line of credit can pay off your highest-rate cards, sometimes with tax-deductible interest. Or transfer balances to a lower-rate card and close your old account.

NOTE: Navy Federal offers short­term, low-interest consumer loans, home equity loans and lines of credit and the chance to transfer balances from high-interest credit cards to one with a lower interest rate.