Debt has become an indispensable part of our life. With increased awareness around financial products and enhanced accessibility, it has become easier to avail credit for meeting life goals as well as a means to aid monthly cash flow. Pre-approved loan offers also make it easier to avail credit without having to go through a stringent application processes. Financial marketplaces like Paisabazaar.com also help people avail loans and credit cards easily and guide them to make smart use of credit.
However, dealing with multiple debts such as home loan, car loan, personal loan and credit cards can be overwhelming. This is why many users are looking for ways to become debt free. Some also associate the term ‘financial freedom’ with being debt-free.
But what does it mean to debt-free and is it really a good idea? Let’s find out.
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Tuesday 05 Nov. 2024
Being Debt-free Vs. Carrying Good Debt
Some people are of the opinion that being ‘debt-free’ means to be free of all kinds of debt, even if it is a low-interest home loan or a credit card bill that you pay month on month. Under this scenario, you would be living purely on your monthly income out of which you would also be saving and investing some amount. People who are debt-averse may find this to be the right spot as it would offer them better control over their finances. When there is no debt to pay off, you can choose where to spend your money.
On the other hand, sometimes being ‘debt-free’ might refer to a situation wherein you would have to let go of high-interest outstanding debt such as credit card overdue or multiple personal loans. In this case, you can make certain exceptions and choose to keep a long-term, low-interest debt such as a home loan. You might also put monthly spends on credit cards and pay them off every month, thus utilizing the benefits of credit cards and maintaining a good credit score, without incurring debt.
Benefits of Living Debt-Free
Here are a few ways how being debt-free can help you:
Control over your Finances-With debt, a major portion of your income goes towards EMIs and interest charges on the outstanding amount. When you choose to pay in cash for everything, the cost of the product or service would be the actual outgo from your wallet, without any interest. Also, when you do not owe any money to anyone, you would have more cash in hand which you can choose to utilize the way you want. You can make purchases, save the surplus or invest it.
Financial Security-When you have more cash at your disposal, you would be able to set aside a higher amount towards emergency fund. Substantial corpus in your emergency fund will strengthen your financial condition.
Peace of Mind- Debt, if not managed wisely, can be quite stressful. When you live debt-free, you have more financial control, thus giving you peace of mind.
The Downsides
Negative Impact on Credit Score-Your credit score is based on your payment records, credit utilization and several other factors. When you close all your credit accounts, there may not be enough information with credit bureaus to build a credit profile. While this may not be a problem if you do not plan to take any loans in future, it can be a hindrance in case of an emergency when taking a loan could be your sole option.
Unavailability of Pre-approved Offers-Lenders usually extend pre-approved loan offers to those who have excellent credit. When you choose a debt-free lifestyle, you will miss out on these offers which could be helpful in case of emergency.
Higher Cost of Future Debt-Even if you choose debt-free living, sometimes debt becomes a necessity. For instance, you may need to avail a home loan 10 years down the line but,when you do not have a good credit history to show, lenders could find you a risky borrower. They might reject your application and, even if they do approve, the rates of interest might be higher. With no credit history, you would not be in a position to negotiate a better deal.
Bottom Line
Living debt-free, in literal sense, means owing no amount whatsoever to any lender. However, several factors come into play when you choose to be debt-free. Firstly, it is a time-taking process, depending on how much amount you owe to different lenders, the total interest outgo and the extra amount that you can spare every month to pay for it. You must review your monthly expenses and create a debt repayment strategy to reach the debt-free stage.
Having said that, keeping at least a few types of credit account open is good for your credit health. Bureaus need to assess your financial activity such as credit card bill payments, loan EMI payments, etc. Thus, we suggest that you make a few exceptions to your debt-free living plan and have some credit accounts open.
For instance, you can take a low or no annual fee credit card that matches your spending habits. Regularly putting certain purchases on credit cards and paying the dues timely will help you build and maintain a good credit score.
