SOURCE: Certified Financial Planner Board of Standards, Inc.

CFP Board

November 12, 2009 11:45 ET

Know the Difference Between Good Debt and Bad Debt

WASHINGTON, DC--(Marketwire - November 12, 2009) - The New Financial Realities: Personal Statement by Eleanor Blayney, CFP® Consumer Advocate for the Certified Financial Planner Board of Standards (CFP Board):

In the current financial crisis, we have learned that we can no longer afford to borrow as we did in the bubbly pre-recession days. There are new financial realities; we must re-examine some basic assumptions and consider some new approaches. Over the course of this series, we are looking at nine important financial strategies. This week: Learn the difference between good debt and bad debt.

The difference between good debt and bad debt is simple. Good debt exists when you borrow money to finance assets that will appreciate in value in the long run, such as education, homes, and businesses. Bad debt is borrowing money to purchase depreciating items to enjoy in the present and having to pay for them in the future, long after these items have been used, worn, enjoyed, or discarded. Once you determine when it makes sense to borrow, it's just as important to manage the money you borrow.

The average American household has more than $8,000 in credit card debt. If the minimum amount is being paid towards your total balance every month, it will take nearly a decade to pay off. Although one may think minimum payments are better than no payments, this approach to debt payment can still sabotage your financial future.

Here are a few strategies on managing your debt effectively:

--  Start by knowing your FICO score, which is used by lenders to decide
    if you are financially able to repay a loan back given your credit history.
    FICO scores have become very powerful in the last few years.  They
    determine not just your cost of borrowing, but your ability to get a loan,
    a job, a lease, even your insurance premiums.  If your FICO score is
    limiting your financial options, you need to take aggressive steps to get
    it in the good credit zone.
--  Create a debt payment plan; getting your balances down should be the
    overall goal.  Cancelling accounts or transferring balances is not the best
    way to manage your debt.
--  Read the fine print.  It is important to read and know the terms on
    credit card, mortgage and car loan agreements. Creditors are required to
    provide this information and to notify you when there is a change in the
    terms, but often this notification is easily missed in the fine print.
    

As the Consumer Advocate for CFP Board, I want you to remember not to borrow trouble. Managing your debt is every bit as important as managing your investments for your financial future.

To view the new financial realities series, please visit http://www.cfp.net/learn/advocate.asp

Eleanor on Twitter: http://twitter.com/EleanorBlayney

Eleanor on FiLife: http://www.filife.com/user/eleanorblayney

Eleanor on LifeTuner: http://www.lifetuner.org/users/eleanorblayney

About CFP Board:

The mission of Certified Financial Planner Board of Standards, Inc. is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for personal financial planning. The Board of Directors, in furthering CFP Board's mission, acts on behalf of the public, CFP® certificants and other stakeholders. CFP Board owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements. CFP Board currently authorizes more than 60,000 individuals to use these marks in the United States. For more about CFP Board, visit www.CFP.net.

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