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Good debt is a loan that helps put you in a better financial position. Taking out a loan so you can pay over time for a big necessary purchase, like a washer and dryer, is one example, especially because you could pay off the loan and still own the equipment for 10 more years, at no significant additional cost. Taking out a mortgage to buy a home could be another good form of debt. You will have to be able to afford a down payment, but while you pay off your mortgage the value of your home could significantly increase. Student loans can be another example, particularly if a college or graduate degree will improve your earning power in the future. Bad debt is debt you take on to allow you to spend more than you could otherwise afford. This can easily happen with credit card debt or store-charge-card debt, for instance.

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If you decide you can afford to borrow money (because you’ll have to pay back your loan), you have many borrowing sources you can choose from. When it comes to financial institutions, you can borrow from retail banks and savings banks, credit unions, consumer finance companies as well as insurance companies. Other borrowing sources include credit card companies, your retirement funds, the U.S. government – and, of course, family or friends. 

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When you take out a loan, you should know that you will owe your lender the initial amount of money you borrowed – the principal – as well as compensation for lending you the money, which is called interest. The interest rate is the percentage of the principal you owe for borrowing over a certain time period, usually a year. Interest payments are calculated with either simple interest, which is a flat percentage of the principal, or compound interest, which is a percentage of the initial principal plus the interest payments that have already accumulated over time. If you miss a loan payment, your lender will charge you a late fee and the interest rate could increase. What you ultimately owe will not only be more than you borrowed but it will be more than you originally agreed to pay to borrow. A missed payment can also adversely affect your long-term ability to borrow. 

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Your credit score is a three-digit number calculated using your bill-paying and debt histories as well as a statistical comparison to other borrowers. There are several different credit score computation methodologies but the most widely used is FICO, named for the Fair Isaac Corp., which developed the calculation. FICO scores range from 300 to 850 points.

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Typically, people with a credit score of 700 or higher are best positioned to qualify for favorable loan terms with best (lowest) interest rates. Scores lower than 600 are often considered “sub-prime,” meaning the score-holder poses a higher risk to lenders.

A: You can check your credit score as often as you like. And since your score can change at any time, you should do it often. Checking it yourself will not have a negative effect on your score and is a good way to keep tabs on your creditworthiness in the eyes of lenders. Note that your credit score does not automatically come with your credit report. To find out your score you will have to pay for it. Your best bet is to order your FICO scores at myFICO.com from both Equifax and TransUnion. Check your score frequently—quarterly or even monthly—particularly if you are planning to ask for a loan in the near future. In accordance with the Fair-Credit Reporting Act (FCRA), every 12 months all Americans are allowed one free credit report from each of the three national credit agencies: Equifax, Experian and TransUnion. To get an official report visit AnnualCreditReport.com, a site that was set up by the three national agencies and is the only source for obtaining authorized reports. It’s a good idea to order reports from all three agencies since they collect information from different sources and can sometimes have different information about your credit. Read your report carefully to find out about any late credit payments, inaccuracies or signs of fraud.

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Yes. If you miss a credit card or mortgage payment the lender will share the information with the credit agencies and it can negatively affect your score. Even if you pay off overdue debts, the credit reporting agencies can keep marks on your report for up to seven years. So even if you no longer owe money it could take some time for you to improve your credit score.

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Yes. Store-brand credit cards, like the ones Macy's and J.Crew offer, function just the way those from the likes of Visa do. Retail stores use the cards as a way to encourage customer loyalty and big-ticket purchases by offering perks like discounts, free delivery or scoops about upcoming sales. While the savings might be useful if you do a lot of your shopping at a particular store, you should also know most store-brand cards have very high annual percentage rates (APRs) — significantly higher than “normal” credit cards — as well as steep late fees if you are behind on a payment. Even if you are diligent about paying your bills on time, you should know that applying for multiple store-brand cards can also hurt your credit score since credit agencies could count new applications for credit against you.

A: Generally speaking, you should not own more than two credit cards at any given time. Having a small number of accounts to track and manage will help you pay bills on time, keep debt levels low and avoid having inactive cards canceled by your credit card company.

A: No. There is no limit to the number of credit cards you can cancel in a year. But go ahead and pay down your balance in full before you do so. (Otherwise, it could hurt your credit score.) Also, be aware that canceling a credit card will not erase history: if you have already missed a credit card payment, the issuer will have shared the information with the credit agencies who will keep marks on your credit report for up to seven years. So while canceling is a good way to limit overspending it won’t negate a poor track record of irresponsible borrowing.

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Indeed, it can be a good idea. Earning one or two percentage points of interest on your savings, while paying double-digit interest rates on your credit card debt, gets you nowhere fast. To add to the injury, you pay income tax on the meager savings interest, and you can’t deduct the credit card interest from your income taxes.

 Seriously consider paying off high-interest credit cards or auto loans with savings. Pay off the cards with the highest interest rates first. Be sure to keep enough money in an emergency fund or in available cash advances to cover three to six months’ worth of living expenses. 

 

Provided by MSN Money Fast Answers.