Thinking Money | Free Financial Advice and Tips

Savvy credit card spending – turning bad debt into good debt

Posted on 06. Jan, 2011 in Saving money

Fearing debt can be just as damaging as falling into it in some instances. In many walks of life, you really do need to spend money to make (or save) money. Borrowing money to buy something, especially something as big as a house, can be daunting at first, but can also reap major rewards if done in the right way. If the purchase is smaller, spending on a credit card may be the best way to go.
Here’s a few ways that borrowing money could be a savvy long-term move:

Taking out a mortgage to buy your first home

Often the hardest part of getting a mortgage is saving up a deposit, which is usually at least 10 per cent of the value of a property. However, once you’ve got a decent amount squirreled away, you can find yourself at something of a crossroads. Continuing to rent where you live could seem a safe option – there’s no debt involved and with savings behind you, you’ll always be able to cover the rent, even if you lose your job. However, the rent is effectively ‘dead money’ – you’ve gained nothing of tangible value by putting cash in your landlord’s pocket.

Taking out a mortgage is a big decision, especially if it’s a six-figure amount. Although house prices can fluctuate, when the market picks up, you’re likely to be left with more than you put in – along with having somewhere to live that’s your own.

Paying for home improvements with a credit card

If you’re planning to sell your home, paying for a home improvement such as a new kitchen with a credit card is a calculated gamble. The aim of the exercise is to add more value to the home than the cost of the credit – meaning you’ll be able to pay back the money you owe once the house has been sold. Other options for paying for the work could include taking out a bank loan or remortgaging your property – a financial advisor should be able to take you through your options.

Taking out a car loan to buy a new vehicle

If you already own your car outright, it could seem a strange idea to pay for a new one using credit. However, if your vehicle is old and inefficient, you could be spending far more than the difference on petrol and repairs, meaning that buying a newer, cleaner model is a better bet in the long run.

In all instances, the key is understanding the difference between good and bad debt – and the role that risk plays in improving your financial health.