Money

3 ways to make your debt work for you

Debt is bad. At least, that's what I grew up hearing from my father and mother. They came from a generation that saw debt as a set of financial handcuffs, and in many ways, they're correct.

When you spend more than you make, the resulting deficit needs to be dealt with and often people use revolving lines of credit, like credit card debt. While credit card debt itself shouldn't be feared, accumulating too much of it can be one of the most damaging things you do to your financial situation.

So, yes, making deficit spending a habit to support your lifestyle can be a recipe for disaster. But there are times when managed borrowing and stable repayments can help set you up for success down the road.

Much of that has to do with understanding credit scores and how they work.

Dominick Chu
David A. Grogan | CNBC
Dominick Chu

A credit score is a measure of how trustworthy you are as a borrower. The higher the score, the more likely you are to pay back your loans and the more likely lenders are to do business with you on good terms. The lower the score, the less appealing you are as a prospect and the harder it is to borrow money. The money that you will be able to borrow will be subject to higher interest rates.

Making the regular minimum payments on debt you have will go a long way in showing potential lenders that you can be trusted to borrow money and pay it back. That's especially true with the big bills, like student loans, car payments and eventually a mortgage. If you're able to arrange your personal budget in a way that lets you pay off higher interest rate debt at a faster rate, then that's definitely a route worth considering, as it will save you lots of money in interest over the longer run.

Here are three ways you can use various types of debt to your advantage.

Keep up with monthly payments on your student loans

One of the worst things young adults can do early in their professional lives is to put student loan payments on the back burner or ignore the payments completely. It's disastrous for your credit score.

Plan your budget and put regular monthly student loan payments near the top of the list. Later on, you may be able to look at other options to help pay your loan off in a shorter period of time.

Build a credit history

If you're young and just starting to make it on your own, consider acquiring a credit card that's suitable for your individual circumstances. If you don't currently have a solid credit history, or are recovering from credit issues in your past, getting a low-limit card and using it effectively could help put you on a path towards boosting your score.

Christian (left) and Dom Chu discuss Christian's financial situation in the first episode of CNBC Make It's digital series, "Saved."
Christian (left) and Dom Chu discuss Christian's financial situation in the first episode of CNBC Make It's digital series, "Saved."

Many credit cards are available for people who have little or no credit history. When you make regular payments and keep your outstanding balance low compared to your credit limit, you'll get positive marks.

Play the long game

If you have open lines of credit, consider keeping them open, even if you're not fully using them. One of the things many people don't realize is that age of credit lines can positively affect your credit score. The longer a credit line is open and in good standing, the better it is for you.

But the key is making sure you keep up with the regular monthly payments and pay those bills on time. Late or missed payments can damage your credit score.

Very few people are fortunate enough to be able to afford life's bigger purchases, like cars and homes, using nothing but their savings and investments. Almost everyone must borrow at some point and repay that debt over time. Boosting your credit score now will lead to lower relative borrowing costs in the future. And learning to manage your debt effectively now could save you loads of money later on when it really counts.

So if you've got loans, remember, that's not the end of the world. Managed well, that debt could become an eventually asset.