(MoneyHippo.com) – Debt can be a double-edged sword. On the one hand, you can use it to buy appreciable assets and grow wealth. However, acquiring the wrong kind of debt can sink your whole financial plan, leaving you worse off than where you started. In a climate where inflation shows no signs of slowing down, you need to know the most damaging types of debt and why you should steer clear.
- Credit Cards: Carrying a credit card balance means paying more for every purchase you make because of the interest. Once you accumulate a rolling balance, it can be challenging to pay off, keeping you from growing wealth. Avoid using this tool unless you can pay off the entire amount each month.
- Car Loans: Although most people need a vehicle to get to work, run errands, and travel, the truth is cars immediately depreciate as soon as you drive off the lot. That means the loan amount will typically exceed the value of the asset. Consider buying a used vehicle and skip the financing if you need a car.
- Payday Loans: Some lenders offer a short-term borrowing option using your income to qualify. Payday loans, or cash advances, typically have an extremely high-interest rate, include hidden fees, and lenders don’t usually check the borrower’s ability to repay the loan. The balances on these obligations can accumulate very quickly, making it difficult to climb out of debt.
To avoid debt traps, only take loans for assets that will increase in value whenever possible, like houses or real estate. Also, create a budget and live within your means to avoid taking on debt that doesn’t benefit your financial plan.
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