University of Wisconsin - Extension

Credit is a powerful financial tool, but credit can either help or hinder your personal financial situation, says a University of Wisconsin-Extension family financial management specialist.

"Good credit helps you realize your financial goals at a reasonable cost," says Linda Boelter, Certified Financial Planner. "Bad credit charges excess finance costs, stretches out your payments to lengthen your indebtedness, and threatens your financial security."

As a general rule, Boelter says purchases should last longer than the time required to pay off the debt.

For example, a mortgage is a "good" debt. Even though you are paying a lot of interest charges over the 30 years it takes to pay off the mortgage, at the end your house is still standing. Also, your house usually increases in value, which helps to offset some of the interest cost.

A student loan might also be considered a good investment if it's used for an education that increases your earning power, Boelter adds.

Car loans can be "good" debt, provided that the payments are affordable and that you pay off the loan before you are ready to trade in the car for a new one.

One formula for determining affordability is to spend no more than 10 percent of your income multiplied by the number of years you're financing the car. Boelter suggests limiting that to four years, because at five or six years, it's often time for a replacement.

"So if you earning $50,000 a year and you have a four-year car loan, you should limit your purchase price to $20,000."

Boelter says "bad" debt includes almost everything that adds to your unpaid credit card balance. It may start our innocently, but if not paid off, it can quickly add up to seriously affect your financial well-being.

"Take the $19 pizza you charged last night. If you don't have a balance on your credit card and you pay the bill within the 20-to-25 day grace period, you don't pay an extra dime," Boelter says. "But if you add that charge to an unpaid balance and make only the minimum payment, that 'inexpensive' dinner can end up costing you over $40!"

If you would like some help in sorting out "good" debt and "bad" debt or need some ideas for getting your debt under control, contact your county UW-Extension Office and ask for information about "Money 2000 and Beyond." This educational program is designed to help you learn to pay down your debt, increase your savings and improve your finances.

As part of the program, you can request a confidential computer debt analysis that shows you how to pay off your debts using the "Power Pay" strategy.