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In some corners of the world of personal finance advice, going into debt is just about the worst thing you can do. And yes, some forms of debt, particularly those that charge high interest rates, can keep you stuck in a cycle of owing money for years.
Still, there are times when taking on debt serves a purpose in your overall financial picture. Debt is not always bad, although there is always the risk that it will go out of line. It’s simply a tool you can use to make a very large purchase without depleting your savings.
“I think it’s very important that people don’t fear debt, but instead see it as something they can use to their advantage,” says Kara Duckworth, certified financial planner and managing director of customer experience at Mercer Advisors.
Here are some examples of when the ability to borrow money can be useful.
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For something that can go up in value
Debt is often classified as good or baddepending on why you’re borrowing money and how much you’ll pay in interest.
“Good debt can help you advance in your career and in your life,” says Mark Reyes, certified financial planner and senior manager of financial assistance at financial services app Albert. “On the other hand, bad debt can keep you from reaching your goals.”
Mortgages are commonly cited as an example of good debt, as a home can appreciate in value. “That’s not a bad debt to have; it’s going to put a roof over your head,” says Bill Hampton, certified financial education instructor and CEO of Hampton Tax and Financial Services in Atlanta. Of course, borrowing more than you can afford or not understanding the loan terms can cause financial risk.
Student loans are another generally accepted example of good debt, as your education can increase your lifetime earning potential. According to Hampton, “You will be in debt for several years, but you will get a better paying job. But if his specialty doesn’t support his debt, it might slow him down.”
To finance a major purchase
Now for bad debt: credit cards. Not only do they charge high interest rates, but you can still make purchases even if you still owe money from previous months. It’s easy to end up with a balance that keeps growing, no matter how hard you try to reduce it.
However, some Credit cards Offer interest-free promotions that you can use for a large purchase. These promotions allow you to spread a cost over many months, often 12 months or more, depending on the card. However, make sure your budget allows you to pay it off within the promotion time frame, before interest kicks in.
If you have existing debt, balance transfer cards allow you to transfer that debt and pay no interest for months. But, as always, make sure you understand the terms of the card you’re using: You’ll likely pay a fee for the transfer, and the interest rate will go up again once the promotion ends.
Once you own a home, borrow against its value in the form of a home equity loan or home equity line of credit —or HELOC— can free up cash for home renovations. Homeowners can choose to do this instead of putting renovation costs on a credit card that charges a higher interest rate.
“Depending on the amount of capital a person has and their specific situation, it might be better to take advantage of that than a credit card or a personal loan,” says Reyes. “It’s like the lesser of two evils.”
To weather unexpected costs
You’ve heard the lecture before. You need to have emergency savings. But that’s the thing with emergencies: They happen randomly and sometimes simultaneously, whether or not you’ve been able to save extra money.
These are the times when you may need to make the best less than optimal decision, and that can mean going into debt. HELOCs and personal loans can be a lower-interest way to borrow money to cover an emergency, but credit cards can also serve as a backup source of emergency funds.
If an emergency expense lands you in credit card debt, Hampton recommends making a plan to pay off that balance in a few paychecks. You can also take other steps to lower the cost of your debt, like transferring debt to a balance transfer card or seeing if your credit card company will cover you halfway.
“Consider calling your credit card company and trying to negotiate a lower interest rate than what they’re charging you,” says Reyes. “It’s not always successful and it’s not likely, but it’s worth trying.”
This article was written by NerdWallet and originally published by The Associated Press.
The article 3 times debt can be a useful tool originally appeared on NerdWallet.