1. Borrowing to buy depreciating assets
Problem: Your IOU becomes an OMG when a purchase loses value. That’s why the last housing crisis was so devastating to many families. Everybody who was suddenly left with an underwater mortgage — meaning they owed more than their homes were worth — learned this the hard way.
How to avoid it: Homes typically increase in value, although that’s not always true, as the Great Recession reminded us. Meanwhile, just about everything else loses value after you purchase it. Borrowing money to buy things that decrease in value — like cars — simply compounds the loss.
Ideally, credit should be used to buy only those few things that generally increase in value: a house, an education and maybe a business. If you’ve already dug yourself into a hole, check out “How to Pay off $10,000 in Debt Without Breaking a Sweat.” And if you want to buy those nice things without credit, try “7 Proven Ways to Supercharge Your Savings Today.”