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Is debt a four-letter word or a good financial strategy?

By , CardRatings contributor
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Many people assume that all debt is bad while other people have a wallet full of maxed-out credit cards. Interestingly enough, debt can be either a positive or negative, depending on the type of debt and your personal financial situation.

"Unless you are independently wealthy, win the lottery or live a poor man's lifestyle by choice, you will need to have some sort of debt to function," says John Ulzheimer, president of consumer education for CreditSesame. "We tend to only think of credit cards, auto loans and mortgages as debt, but cable, cell phones and public utilities are all debt."

However, there are definitely some types of debt that are a smarter financial choice than others.

"I do believe that there are varying categories of debt," Ulzheimer says. "The key question to ask yourself about any debt is, 'Is this debt working for me or against me?'"

Here are four common types of debt:

Credit Card

Most people would automatically put credit card debt into the bad debt category. However, Rod Griffin, director of public education at Experian, says that the real issue with credit card debt is your ability to repay.

"If you are taking a credit card temporarily to take advantage of cash back offers, airline miles or discounts and can pay it off at the end of the month, then credit cards can be a great way to take advantage of the benefits," says Griffin. "However, if you make a credit card charge on an impulse buy and have no idea how you are going to pay, then that is almost always bad debt. If you are revolving the debt each month then you take on fees and interests costs, which is not a good debt."

Student Loans

While student loans have received bad press in recent years, most experts still say that a college education in a major with good employment prospects is a good debt. However, before taking out student loans, consider the cost of the college you are attending compared to your anticipated annual income. Make sure you can afford the monthly payments based on the average annual income of your expected major. If not, consider a state school or community college to keep the amount of your loans as low as possible.

"People across the board who have college degrees typically make more than people with only high school degrees," says Ulzheimer. "Because student loans work for you, you have to consider it good debt."

Mortgages

For many years, consumers had been told that a mortgage is a good debt since homes typically increase in value. However, the recent recession and housing crisis have caused many experts to caution consumers to think carefully before taking on a mortgage.

"People previously assumed that owning a home should be a part of everyone's wealth building strategy. Historically that was correct and maybe that will be true again in the future, but right now I don't think it is a good assumption for everyone," says Gail Cunningham, vice president for membership and public relations at the National Foundation for Credit Counseling.

Cunningham said that renting a home instead of taking on a mortgage is a smarter move in some financial situations.

"However, if you can easily afford the monthly payments, then a mortgage can still be a good debt in the right circumstance," she says.

Auto Loans

Car loans are another type of loan that can be either a good or bad debt depending on your situation, the amount of the car loan and how that compares to your income.

Cunningham recommends determining the monthly payment for the car you want to purchase and paying yourself by putting the same amount into savings for several months.

"If you don't miss the money and can comfortably make the payments, then the car loan is most likely good debt," Cunningham says. "You can then use the money you have saved for your down payment."

However, if currently you have no debt, you will be unable to obtain credit if you need it down the road. By taking the time to carefully consider each loan or credit card in relation to your unique circumstances, you can use debt to work towards your financial goals.

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