Do you really need credit? It may surprise you, but the answer is yes.
You will need to take out a loan unless you have enough cash to pay for life’s important - and expensive - purchases. This is known as debt. Without taking on debt, many people wouldn’t be able to buy a car, a house or afford to continue their education. Debt is a financial resource that you need to learn to use wisely.
Your ability to borrow money is based on your reputation with credit, also known as a credit score or your credit history. Building a positive credit reputation starts with having debt. Paying it back responsibly helps to build up your credit score. And a variety of different debts in good standing can lead to a strong credit score.
Plan and prioritize your goals to help you determine whether taking on a new debt will help you reach a goal or set you back. Below are examples of debt that may help you reach a goal (good debt) or set you back (bad debt).
What is Good Debt?
Consider true “needs” or things that will benefit you in the long run as good debt. It is usually cheaper than bad debt. That means the interest rate you pay on good debt is much lower than the rates on bad debt.
Student Loans
Student loans typically have a very low interest rate compared to other types of credit or debt. A skilled trades program or college education raises your potential future income, so investing in education by taking out a student loan now may mean a higher income for the rest of your life.
Auto Loans
An auto loan can be a great place to start your credit journey. Borrowing and repaying a few thousand dollars for a used car can show years of responsible behavior to credit bureaus. Remember: to build good credit you must be able to afford all the payments. Vehicles depreciate (which means lose value) over time so borrow conservatively and don’t borrow more than you need.
If you’re ready to take on an auto loan, make sure to check out rates before you start shopping for a car. Credit unions tend to have lower rates than banks - check out our rates at MSGCU.
Mortgages
Mortgages are loans for an appreciating asset like a house or condo. That means they usually grow in value over time or can even generate income. Since homes cost a lot, you’ll likely need a loan to pay for it. The great reputation you’re building now in your credit history will benefit you when it’s time to get a mortgage. Saving even half of a percentage point in interest on a mortgage can save you thousands of dollars over the life of a loan.
Good debt that can turn bad if you’re not careful
Even good debt can turn bad if you are not diligent about paying it. So only borrow what you can realistically afford.
Credit Cards
Credit cards can be a useful tool. A credit card can build your credit history, help with debt consolidation, and help improve your credit score if you pay on time and use only a portion of your available credit (that means don’t max it out). Keep a close eye on the credit card limit and what you owe on that card – the goal is to keep as much distance between the limit and what you owe as possible.
When looking to get a credit card, make sure to check out both fees and interest rates. Often your credit union will offer a credit card with lower fees and better rates than the big banks (or even tech companies), so take a couple minutes to research some options that are right for you. If you think you’ll need to carry over some of your balance from month to month, check out cards with a low, fixed rate. Look for the acronym “APR” in advertising. MSGCU has a few great options for low-rate cards if you’re looking for one.
Keeping these tips in mind will help credit cards stay a tool and not turn into a trap. Credit cards generally charge an interest rate higher than most loans, which can make it easy to accumulate debt. This is especially true of retail credit cards, meaning cards for individual stores. Having even a small balance on multiple retail cards quickly adds up. Plus, using multiple credit cards means multiple due dates and a higher potential for missed payments or multiple late fees.
High credit card debt means more of your payment goes toward the interest making it extra difficult to pay off the balance. It’s easy to feel trapped under mounting credit card debt. Talking to a caring financial expert can set you on the right path if you need it. Michigan Schools and Government Credit Union has friendly staff specially trained for this.
Personal Loans
Personal loans are often a great tool for lowering interest rate and can be very helpful in a pinch, like an unplanned hot water heater purchase or unexpected car repair you need to get to work. Plus, these can be great options for debt consolidation. You can consolidate multiple high-rate credit cards into one more manageable and lower-rate personal loan.
Personal loans can be secured or unsecured. Collateral is involved in a secured loan, such as your auto or home. Collateral is a tangible object that can be taken away due to nonpayment. Secured loans typically have a lower interest rate than unsecured loans.
Unsecured loans are used for intangible things like a wedding or vacation - there is no item to repossess if you don’t pay so interest rates tend to be higher. An unsecured loan is purely based on the trust that you will pay it back, so the expectation of on-time future payments is based on your previous borrowing and repaying history. Those with poor or little credit may not be eligible.
What is Bad Debt?
Bad debt is often for nonessentials: the things you want like multiple cars, the latest big screen tv, a new bedroom set, or a charge card to your favorite clothing store. If the expense puts you farther away from reaching a goal, it might be a sign it’s bad debt. Going into debt buying nonessential goods or services can impact your credit score and make it more difficult to move toward your financial goals.
Payday Loans
Payday loans are the worst type of bad debt. They may sound like a good idea or your only choice in the moment, but they come with a high price to pay. High fees and high interest can start a vicious debt cycle. If you’re in a situation where you’re considering a payday loan, please reach out to us first to see if we can help. Our Certified Credit Union Financial Counselors are trained to help you build credit and may be able to provide an alternate option.
Know where you stack up
Find out what your credit reputation is and get your credit score. This can also be called a FICO score. Try checking it every year around your birthday. Think of it as a present to yourself, a clean bill of financial health, or an opportunity to catch an issue early.
We recommend getting your free credit report, available when you sign in to your MSGCU Online Banking Account or in the MSGCU Mobile App. If you want help reading or interpreting the information, bring it to your local credit union. Here at Michigan Schools and Government Credit Union, we are dedicated to promoting financial success for our members. Every branch has Certified Credit Union Financial Counselors, ready to help!
Sources:
Chatzy, Jean. Money Rules: The Simple Path to Lifelong Security. Rodale, 2012
It’s a Money Thing program
As you learned, credit is important in building your credit score. Learn more about credit scores in this 5-minute lesson.
Category: Finance
« Return to "Blogs"
You May Also Like
First timers’ guide: The three stages of the homebuying process
The process of buying a first home can seem overwhelming. With a step-by-step approach, the experience becomes less daunting – and a lot more fun.
The Heart of Your Finances: Your Checking Account
Maybe you’re considering opening a checking account or aren’t even sure if you really need one. The experts at MSGCU say you do and here’s why.
Don’t go mad this March over gambling. Understand the risks of online sportsbooks.
Sportsbook apps seem like a fun and easy way to win money. Like any form of gambling, they run the risk of monetary losses that can seriously impact your finances.
Four Steps to Go From Renting to Buying
Tired of renting your home, but not sure you’re ready to buy? Here’s how to make the best decision and go from renter to buyer when you’re confident it’s time to purchase a home.
The Post-Holiday Budget Recovery Guide
The holidays are in the rearview, and if you’ve gone over budget with your spending, it’s time to deal with the aftermath. Here’s how you can get your budget back on track for the new year and avoid future budget-busting.
New Year Financial Resolutions
The New Year brings new financial goals, yet many of us feel overwhelmed when we start thinking about what we might tackle as a resolution. Here are 6 tips to get you started from the experts at MSGCU.
5 Ways to Increase Your Credit Score
Your credit score is vital to your financial health. An excellent credit score can open the door to large loans and better interest rates, as well as employment opportunities and more.
Discover the best ways to build and maintain an excellent credit score.
Payday Loans: A Serious Problem with A Smart Solution
Payday loans can seem like an easy way out of a financial jam, until you get caught in the spiral of fees. Fortunately, MSGCU has you covered when unexpected needs arise and you’re out of funds until the next pay day.
Are you ready for a disaster?
September marks National Preparedness Month. Whether you prepare now or at another time, MSGCU can help with these tips.
Mortgage options to help you unlock the door of your dream home.
Not all mortgages are the same. Rates, product offerings, and other benefits add up to your perfect mortgage package.
9 tips to follow on National Financial Awareness Day
MSGCU helps you get the most out of your money every day.
Is it time to choose a new bank?
Read on for 4 signs it’s time to leave a bank, and 4 questions to ask a new one.
Why CDs are a Great Investment for Younger Savers
For millennial and Gen-Z savers, Certificates of Deposit offer the best of both worlds: high returns & no risk.
A Blueprint for Managing Credit Card Debt
Paying down high-interest rate credit card debt can feel overwhelming sometimes. Check out these tips to help you effectively knock out your debt.
How To Make Certificates of Deposit Work for You and Your Savings Goals
Is building your savings account a priority in your financial goals? Learn more about your options and determine the right choice for you when it comes to savings accounts and certificates of deposit.
Beyond the piggy bank: 5 ideas for helping kids achieve more financial independence.
Teaching kids about money management can seem daunting, but it doesn’t have to be complicated. Read on for five simple money truths to help prepare your kids for a successful financial future.
What to do before getting your first loan.
You’re considering a big purchase, and you’re going to need a loan to make it happen. Before you take the plunge, take these steps to make sure you’re ready for your first loan.
Turn renting into owning with our step-by-step guide
Tired of renting, and feel the homebuying process can be overwhelming? See why now is the perfect time to become a homeowner with our easy step-by-step homebuying guide.
Help your college kid make smarter, safer money choices, right from the start.
When your child is ready to head off to college, here are 7 tips from MSGCU you can use to help them build financial freedom and make smarter, safer money choices.
Going to college? Take MSGCU with you.
Learn all the convenient ways you can bank with us, no matter which campus you’re headed for.
Six smart financial moves to make when you get your first “real” job.
Your hard work has paid off and you’ve landed your first “real” job. Congratulations! As you embark on your brilliant career, you can make your future even brighter by making these smart financial moves.
5 steps to RV- and boat-buying for an unforgettable spring and summer.
Ready to spring into Michigan’s warm weather activities with a new or used boat, RV or ATV? Check out MSGCU’s 5 steps to RV, boat and powersports buying.
Applying for a new mortgage? We have tips to save you time.
Whether you are a first-time home buyer or reentering the home buying or refinancing market, the application process might seem daunting. Before you start emptying your filing cabinet for documents, see how you can streamline the application process.
8 ways to get your teen ready for financial independence.
Let go, hang on, let go, hang on, let go … help with getting your teenager ready for more financial independence is here! Read on for wisdom from the financial champions at MSGCU.
5 ways to save money on a new or used car
With a few smart financial moves, you can save a lot of money on your current vehicle or a new car purchase.
Spotted: hidden fees in rates. Here’s what to look for to get the best deal.
A good rate can turn bad quickly when fees and points are included. Read on for a simple tip to spot the best deal when shopping for a mortgage.
Your credit score: What it is and how you can make it better.
What is a credit score, and how can you make sure yours will help, not hurt you? Read on to get answers to these questions and more. We’ll help you get off on the right foot with your credit history.
Spring clean your finances
Whether you are looking for ways to save or spend wisely this spring, the team at MSGCU has options and advice for you.
Two truths and a lie about homebuying success
As the winter turns to spring, many turn to shopping for a new home. An MSGCU mortgage expert describes two truths and a lie about being ready for the spring shopping season.
How to open a bank account at MSGCU
Ready to manage your own money? Read this blog to learn how to open an MSGCU bank account and make the most of your membership.
Your 2022 home goals: Tips for financing home improvements or a new home
A common 2022 goal is home improvement, either with renovations or a move. Here are some tips on financing your goals for the new year.
Start ahead, stay ahead: 7 must-haves for a better first bank account
Think you’re ready for your first bank account? Read on for 7 must-haves when looking for your financial partner.
Is it time to leave your bank?
Learn to recognize the signs that it is time to move on from your current bank and choose the next one. Plus, three key questions to ask when choosing a new bank.
8 questions to ask before taking out an auto loan
Whether you’re buying or refinancing, choosing an auto lender is a big decision. Take your time to find one who will work with you and your financial goals; in other words, do your homework. Read on for 8 key questions to ask lenders before you get (or refinance) an auto loan.
Check interest rates today, save tomorrow.
Could your interest rates be lower or are you paying too much in interest rates? Read on to find out more and what to look for.
10 tips to follow on National Financial Awareness Day.
Financial Awareness Day was August 14. Let MSGCU help you get the most from your money with these tips every day.
8 myths of modern mortgages every homebuyer should know.
Whether you’ve done this before or you’re a first-time homebuyer, getting current about best practices for finding and financing a new home is always a good idea.
5 financial habits to start today
Try these five tips, or start with just one, to bring your financial wellbeing to the next level.
Starting your emergency savings fund
It’s never too late to start your emergency fund. Read on for easy tips you can do today to start saving.
Debit or credit: What’s the difference?
Swiping and signing to make a purchase is so easy these days, but do you grab your debit card or credit card? Does it matter? Read on for answers.
Smash your credit card debt
While not all debt is bad, too much can limit the amount of money you can put toward your life goals. Read on for three easy steps so you can use credit to your benefit versus being overwhelmed with payments you can’t afford.
Small savings = big rewards!
Saving money doesn’t have to be daunting. Read on for quick and fun ways to save from MSGCU’s experts.
Study, work, save: How to win at college.
Save money in college without having to give up everything you love with these tips from Michigan Schools and Government Credit Union.
MSGCU is on the front line of your finances
MSGCU has always been here for its members, even during COVID-19. Learn how we helped members financially impacted by COVID-19.
See you at the drive-thru!
Did you know you can complete the same actions through an MSGCU drive-thru that you can in a branch? The drive-thru is a safe and easy way to complete transactions, and a friendly MSGCU team member is always there to help.