10 Times When Debt Is Actually Your Friend

Debt has a bad rap, and there are good reasons for that. Debt can be too easy to get and too easy to use. Use debt aggressively and it can lead to financial ruin.

Still, debt isn't universally bad. Sometimes, a loan or line of credit can be a powerful financial strategy. Read on for 10 situations in which borrowing money may be your smartest financial move.

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Building credit is an important part of establishing financial independence. With a good credit history, you can access debt when you need it, and at competitive interest rates. You also may pay less on homeowners and car insurance.

The challenge when you're just starting out is that you need credit to build credit. That's why opening your first debt account is a positive financial milestone. Manage that first account responsibly and you're on your way to building a strong credit history. Your efforts will be generously rewarded with lower-interest borrowing costs over your lifetime.

ALSO READ: How to Build Credit Fast

Most people cannot afford to pay cash for their first home. Debt makes the purchase possible. But more than that, homeownership is a compelling financial strategy -- thanks to the characteristics of real estate as an asset and the fixed structure of traditional home loans.

Residential real estate appreciates over time, which increases your net worth. Meanwhile, your traditional home loan keeps the same interest rate and payment for 30 years. If you rented instead, you'd see significant inflation-driven rent increases over those three decades.

Plus, once you pay off your home loan, you own a valuable asset, free and clear. You can live in it to keep your expenses low in retirement or sell or refinance to generate cash.

Debt that enables you to start or buy a profitable business can also be a good thing. Often, launching a business takes more capital than the entrepreneur has on hand. Or, you might have assets you don't want to liquidate -- such as an investment portfolio or retirement account.

A well-researched business opportunity should appreciate and generate increasing cash flows over time. Ideally, those cash flows will fund the debt repayments and meet your income needs. As the business grows, your net worth and financial strength grow, too.

There are risks to taking on a new business venture, of course. But the potential rewards are significant enough to justify taking on some debt to make it happen.

ALSO READ: 10 Checklist Items to Help Start Your Small Business

According to the U.S. Bureau of Labor Statistics, the median income for workers with a bachelor's degree is 67% higher than median earnings for high school graduates who didn't attend college. Specifically, four-year college graduates earn $1,305 weekly on average, while the average high school grad earns $781 weekly.

If a college education raises your income potential significantly, you can use the higher paycheck to cover your student loan payments. Validate this with research. Look into job opportunities for college grads in your field. Also find out tuition costs for the program you want. Local public universities are typically the most affordable.

Cars do not appreciate or generate income. It's quite the opposite. A car loses value immediately when you drive it off the lot.

Still, a car loan helps your finances when you need wheels to get to work and you don't have the funds to pay cash. In that scenario, the car and its financing improve your wealth by increasing your income potential.

Given that cars depreciate quickly, it's smart to be somewhat frugal with this purchase. You don't want a car that will cost a lot to maintain, but you don't need a new, flashy vehicle, either. Shop used cars and get loan quotes from multiple sources.

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If you already have high-rate debt, refinancing it to a lower rate can be a positive financial move. There are caveats, however.

When you refinance debt, the new loan should have a shorter payoff duration along with a lower interest rate. If the payoff schedule is longer, you might end up paying higher cumulative interest costs even with a lower rate. An example would be refinancing credit card debt with a 30-year home loan.

A better idea would be to refinance your credit card debt with a cheaper home equity line of credit. Admittedly, this strategy requires discipline. You'll want to keep your repayments at least the same after the refinance -- even if the credit line has a lower minimum payment.

ALSO READ: Why Refinancing Your Debt to a Lower Rate Doesn't Always Save You Money

Using a mortgage loan to buy investment property is a powerful financial strategy -- if the deal is cash flow positive. In other words, the rental income must cover insurance, maintenance, taxes, other related expenses, and the mortgage payment. In this scenario, you fund the down payment but your future renters cover all other costs.

You do accept the risk that your property will go unrented temporarily. When that happens, you're paying the mortgage without the income to offset it. To manage that risk, research occupancy trends for the property and the neighborhood before you buy. Also keep ample cash on hand, just in case.

You can make strategic use of promotional, 0% rate offers from your bank, credit card, or favorite store. You might use the temporary rate to pay off higher-rate debt or fund a larger purchase.

The right way to use a 0% offer is to pay down the debt entirely before the no-interest period expires. This limits your interest charges to whatever the up-front fee is, which usually ranges from $0 to 3% of the balance.

Also, verify that the offer is truly 0% interest versus deferred interest. A deferred interest program will charge retroactive interest if there's a balance on the card when the 0% period ends. Those terms get expensive if an emergency happens and you can't repay in full during the promotional period.

A no-fee, cash back card gives you rebates for the purchases you're making anyway. If you can stick to your budget and pay off the balance every month, the rebate is essentially free money.

Don't try this strategy unless you're used to following a budget, though. It's too easy to overspend, especially if you have a high credit limit. The rebate will pale in comparison to your interest charges if you start rolling over balances. Specifically, you might earn 2% cash back, but your interest rate is probably 15% or more.

ALSO READ: Best Cash Back Credit Cards for February 2022

We all should have an emergency cash account, but sometimes we don't. Maybe you're just starting out on your own, or you've struggled to save.

If you don't have cash on hand and an emergency arises, a credit card could be your best solution. Charging the expense might be better than using your rent money or withdrawing from your 401(k), for example.

You can keep this move from causing more problems later by reworking your budget immediately. You'll want to trim some spending to make room for repaying the new debt quickly and funding your emergency savings.

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Debt can be your friend when it funds a purchase that increases your wealth or generates income. The trick is that those increases must be more than enough to offset the interest expense.

You can also use debt effectively to get out of a financial jam. This isn't always the case, though -- so look at all your options. Using the credit is only the right strategy when it has the least damaging long-term consequences relative to other solutions.

Debt is risky and expensive. You can respect those drawbacks by limiting your borrowing to situations when it truly makes sense. Learn that skill and you're on your way to reaching your financial goals.

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