One person's $10,000 debt burden is another's $10,000 borrowing deal. While the general rules of thumb are always good to follow -- find the lowest interest rate, pay more than the minimum amount due, lather-rinse-repeat -- there are plenty of times when the rules don't apply. Here are just a few:
When debt's a good deal: Low interest rates characterize what the experts call "good debt," something worth borrowing money to obtain. Mortgages and student loans are two prime examples. They also have another attribute of good debt: They tend to appreciate in value.
Cars, however, start losing value -- depreciating -- the moment you drive it off the dealer lot. And just because you can buy a reclining sectional sofa with cup holders and built-in heated massager at 0% interest for the first six months doesn't necessarily make it a good -- or stylish -- reason to go into debt.
When cash is scarce: If you've set aside some extra cash for that just-in-case scenario, under what circumstances is it worthwhile to dip into the till and pay off your debt? If it's sitting in your checking account earning a paltry .08% interest, chances are it'd do your finances more good if you sent it to Mr. Visa. If this cash stash is your emergency cash cushion and you tend to be accident-prone, you may want to leave a little in your account for another emergency. It could save you from future credit card debt.
If your money is invested in a money market account or certificate of deposit, you'll probably have to pay a small penalty to get your hands on the greenbacks. Weigh that against the interest penalties you're paying by carrying debt, and then proceed.
When the antidote is worse than the malady: If your money is invested in the stock market or carried in a tax-deferred account, it probably doesn't make sense to liquidate investments to pay off the debt. If your portfolio has gained value, you would be subject to capital gains taxes. If your investment is in an IRA or other tax-advantaged account, you will also pay an early withdrawal penalty, plus taxes, if you are younger than 59 and a half. There's also a psychological cost to cashing out investments to pay off debt. Dipping into this money is like robbing your future self.
Sometimes it pays to ignore the black-and-white numbers and do what feels right. For some, that means carrying debt a little bit longer to strike a balance between the spending sins of the past and the opportunities in the future. Only you can decide what's right for you.
