Before we get into the players in the game of debt, you should understand that there is good debt and bad debt. What’s the difference? Simply put, sometimes it’s a good decision to go into debt if that debt will help you gain financially or in some other way. For example, getting a mortgage loan will mean you’ve got a debt to repay; but over time, your home should appreciate in value and, therefore, your debt will help make you money.

Good debt is, in the simplest of terms…

• When the item will outlast the time it takes you to pay it off.
• When the alternative to buying the item would cost you more or put undue hardship on your quality of life.
• When the interest rate is competitive.
• Bad debt is, in the simplest of terms.
• When you’ll still owe money after the item is consumed or worn out.
• When you can live without it by using some self-control or creativity.
• When the interest rate is not competitive.

In analyzing whether a debt is a good one, here is a simple filter to put it through. Will the debt.

1. Give the borrower a legally and morally sound opportunity to get out of the debt or obligation?
2. Be used for something that has a life-expectancy of three years or more instead of something that will be gone, depreciate in value, or be consumed before it is paid for?
3. Be secured by something at least as valuable as the loan itself so that the collateral can be sold to payoff the loan?
4. Be backed by someone or something that has the ability to pay off the loan if the borrower defaults.
5. Have a competitive interest rate? If the loan you’re considering is outside the competitive range, it may signal a problem. If you are a person with a history of credit problems or a low credit score, expect to pay a higher interest rate (up to 5 percent higher) to compensate lenders for taking what they consider to be a higher risk in lending to you.

When you need to borrow money to pay for something, give the loan the security test before you sign the agreement. When you do sign the agreement, make sure you have read, understood, and agreed with the terms and conditions. Don’t take anyone’s word for it until you do.

The Players

To understand debt, you must understand how lending organizations work. You can incur debt from any number of sources. These sources can range from large banks and credit unions to your brother who lent you $100 last payday. The vital part in all these transactions is knowing the terms of the loan-whether it is a mortgage, credit card charge, or whatever form your debt has taken.

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To develop a credit scoring model, random loan customers are sampled statistically to identify characteristics that relate to patterns of repayment. Then, each of these characteristics is assigned a weight based on how strong a predictor it is of the likelihood of repayment. The higher the score, the lower the risk for the lender. A borrower with a score of 660 or greater is considered to be of less risk for the lender, while a score of 620 or lower is a poor credit score. Credit scoring cannot rely on factors such as race, religion, gender, income, address, employment, national origin, or marital status, but some scoring systems may use age as a factor in determining a credit score.

Credit scores rely on the following:

• Occupation and time at present job.
• If you are a homeowner.
• Past payment performance.
• A pattern of late payments brings down the credit score.
• Credit utilization, or the way credit is used. Borrowers who borrow to the limit of their credit cards are considered higher risk.
• Having both a checking and savings account can improve your credit score.
• Credit history, or how long the borrower has been borrowing.
• Someone who has had credit for a long time is considered less risky.
• Inquiries into the applications for credit. The number of times a person has asked for credit or has had an inquiry into their credit record affects the credit score. Frequent requests for credit or frequent inquiries in a short period of time bring down the credit score.
• Types of credit in use secured credit card, installment loans, revolving loans, or finance company lines.

Practicing more responsible borrowing and repayment habits will help improve your FICO score. One thing to be aware of is that while consolidating your bills and closing some of your credit cards may seem like a good idea at first in an attempt to raise your FICO score, it can actually negatively affect it. It brings you closer to your credit limit by removing available credit without reducing your existing debt.

As you can see, your credit score is determined by a number of factors and it is important to take all of these into consideration before taking any action. Improving your FICO score is not something that happens overnight, but taking steps now will get you far on the road to less debt and more cash.

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Credit cards could be considered a staple among the financial tools at our disposal. Some experts consider them a requirement in today’s world. Today, you can’t buy a plane ticket, reserve a hotel room, or rent a car without a credit card. I suggest you view credit cards as a tool that can help you. If you’re responsible and payoff your credit card bill every month, you can use that card to help you earn bonuses such as frequent-flier miles, which is a great benefit.

Credit cards are also known as the best friend of new business owners, who often don’t have the track record to get a traditional bank loan. Often, they can finance their new business by utilizing their credit cards as a lending vehicle, and spreading the payments out over time. While credit cards can be wonderful and offer us convenience, they can be a deadly part of the debt game.

Credit card lenders are really banks. The banks collect deposits from consumers and other entities, and then loan that money out. However, in the case of credit cards, they’re loaning that money out to credit card customers instead of traditional bank lending customers.

A credit card provides high-interest, unsecured loans that allow the cardholder to “buy now, pay later.” This is a very lucrative business for the banks that issue credit cards to consumers. They make up to 21 percent or more on the balance due if the balance is not paid off each billing period, and new purchases begin accruing interest right away.

This is known as a revolving account because the holder can simply roll the new balance to the next billing cycle and pay only the stated minimum amount shown on the bill. These cards mayor may not have an annual fee depending on the other “goodies” like frequent-flier points, money back at the end of the year, or no annual fee.

Credit card rules can also change frequently. What may look like some junk mail may actually be a brochure that tells you the rules of the game have changed. If you don’t pay attention to it, you may be in for Some surprises on your bill. My credit card company changed the envelope that the bills came in and it looked to me like more offers to get a credit card. I threw them away unopened until I got a phone call asking me why I suddenly stopped paying my bill. When we discovered my problem, I agreed to pay it immediately and they cancelled the accrued interest and late charges, due to my excellent payment record. Keeping the cardholders ignorant is an advantage to the credit card issuer but they do have to disclose any changes to your original agreement. If you miss them, you’re the one responsible.

Most of the major credit card companies work hard to educate consumers about credit card debt and how to make it work for you. Next time you’re in the bank or browsing online, look for information about the use of credit cards by the issuing companies represented by the bank.

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