In this issue: Borrowing guidelines

elieve it or not, there's a difference between good debt and bad. Good debt is debt you can afford to repay in a reasonable time. It's for something that is very important to you. And it's for something that has future value; the object you borrowed for lasts longer than the loan. Houses, education and affordable cars are the most common good debts. Bad borrowing, on the other hand, is debt taken on for items that aren't all that important, or that you can't afford to pay off over a reasonable period.

Unfortunately, the challenge of discriminating between good debts and bad is completely on your shoulders. Lenders often will let you take on much more than you can afford. This free flow of funds means it's up to you to make your own rules.

Some borrowing guidelines:
Small purchases (under $500). Most of us don't carry around hundreds of dollars in cash. But financing that new $50 pair of shoes or that $70 dinner out is, frankly, nuts. If you're paying 17% on your credit card and you take a year to pay off the shoes, for example, they end up costing $58.50. After two years, they cost $68.45. Instead, pay cash when possible. Otherwise, use a debit card, which draws money from your checking account as it's spent. Charge small purchases only if you're sure you'll pay off your monthly credit-card bills in full.

Medium purchases ($500-$2,000). If you've been disciplined enough to scrape together an emergency cushion, you can dip in for medium-sized purchases (a refrigerator or new transmission) that are indeed emergencies. Just be sure to replenish your cushion after spending it. If not, put these purchases on a low-rate credit card. While cards with rock-bottom rates (8%) can be tough to come by, fixed-rate cards around 10% are pretty widely available. You can find a list of the country's lowest-rate cards each month in Money magazine.

Large purchases ($2,000-$20,000). Whether you're strapped with unforeseen medical bills or a tuition payment, or want to consolidate all your credit-card payments into one at a lower rate, you have several options. 1) Borrow from your retirement plan. Most 401(k)s allow you to borrow up to 50% of the amount in your plan. It's easy because no credit checks are required, notes Marc Eisenson, co-author of Slash Your Debt (Financial Literacy Center, $10.95). Downside: You pay it back with after-tax money, which adds to the cost of borrowing. You also miss out on gains you might have reaped while your money was out on loan. 2) Borrow from a cash-value life-insurance plan. Again, there are no credit checks. Just make sure you don't take out so much you void your policy (call your agent), and understand that if you die before you've repaid the money, your death benefit will be reduced by that amount.

Jumbo purchases ($20,000 and up). If you're borrowing for home renovations, home-equity loans and lines of credit - where interest may be deductible - make the most sense. They also can be a good way to consolidate your debts (a full third of home-equity loans are taken out for that purpose). The key, if you want to save money over time, is to pay as much (or more) each month toward that loan as you've been paying on all your credit cards combined. Some home-equity loans, in particular, have huge closing costs, so get a good-faith estimate of exactly what the transaction will cost up front. And beware lines of credit with a credit card attached. If a MasterCard or Visa caused you problems to begin with, you don't want to step into that trap again. (Note: If consolidation is your main goal, Eisenson's book is a must-read. It's available at 1-800-255-0899.)