Like most Americans, you will probably take on debt at some point in your life. And by managing debt wisely, you can potentially improve your saving and spending habits — and even your ability to invest for the future.
Let’s look at some of the common options available for borrowing and using credit:
Credit card
When used carefully — and not over-used — a credit card can be a valuable tool, especially if you travel frequently. Many people tend to stick with the same credit card without exploring what else is out there.
Try to find a card that rewards you in as many ways as possible — and then keep your eyes open occasionally for even better rewards as they can change from time to time. You want a card with a low interest rate, although ideally, you’d like to pay the card off each month without incurring any interest. You also should take a close look at a card’s other features. Are you getting a competitive amount of mileage points? How much is your annual fee? Do you have a generous “cash back” program? Do you have access to “extras,” such as airport lounges?
Home equity loans and home equity lines of credit
As the names suggest, a home equity loan or line of credit lets you tap into the equity you’ve built up in your home, which can be considerable, especially if you’ve owned your home for a long time. A home equity loan provides you with a lump sum, which you will repay over a set term with a fixed interest rate. A home equity line of credit usually carries a variable rate, although you might find a lender offering a fixed-rate option. You can generally draw on your loan or line of credit for any purpose, but keep in mind that unless you’re using the funds for home improvements or additions, your interest payments are generally not tax deductible.
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Securities-based lending
Just as a home equity line of credit lets you borrow against the equity in your home, a securities-based loan, such as a margin loan, lets you borrow against the value of your investments, including stocks, exchange-traded funds and mutual funds. Some people take out margin loans to purchase more investments, but you can use the money for any purpose.
The margin loan process is usually not complex and when you make repayments, you’re paying yourself back. However, you should approach a margin loan with caution because if you borrow too much, the value of your margin account may fall below the maintenance requirement — the minimum dollar amount you must keep in your margin account after you’ve started taking money out. When this happens, your brokerage institution may issue a maintenance call that requires you to either deposit more money or marginable securities or sell some of the investments in your account.
Ultimately, when weighing your borrowing and credit options, you’ll want to evaluate several factors: the interest rate you’ll be paying, the purpose for taking on the debt, your ability to repay it without impinging on your cash flow, and so on. With careful thought and planning, and, if needed, help from a financial professional, you can make your debt work for you – and not the other way around.
