“After six years of college, most of my loans are starting to kick in. I haven’t ever missed a payment or done anything to screw up my credit yet and I’m already terrified. Now that it’s a reality, I’m definitely feeling in over my head. I won’t lie.” ~Justin

Just because you can get loans and credit cards, doesn’t mean you should. The first rule of borrowing is that you have to pay it back. Some debt will be necessary to achieve certain goals, like owning a home and getting through school. But making bad debt choices can really mess up your future plans. Always read the fine print, shop around and understand what you are agreeing to when you borrow money.

Robert is a retirement editor at The Motley Fool, a multimedia investment education company. Visit www.fool.com.

How to limit your debt

If you carry debt, you’re not alone. More than 75% of young people carry some kind of debt — and that debt load is increasing. We've grown used to the weight. Taking out a little bit of debt helps us build credit, which is a good thing. But while credit and loans can be helpful, they also can be dangerous.

More than 75% of young people carry some kind of debt — and that debt load is increasing.

Once you have a credit card or loan in hand, you want to be smart about using it. Your goal should be to zero your balance every month.

Do this in four basic steps:

• If you’re in debt, start paying it off.

Don’t get discouraged if you’re in debt. You’re not alone. There are things you can do to limit your spending and start paying off debt. First, write a budget and get rid of any expenses you don’t need. Cut costs wherever you can — big and small. Make sure you have enough money coming in to cover your basic expenses then put the rest toward paying off debt.

Second, take account of all your loans and credit cards, their interest rates, how much you owe and your minimum monthly payment. After you set a budget, figure out what your minimum payment is each month and what you can afford. If you can afford the minimums, set up automatic payments.

If you can’t afford the minimums, call your credit card companies and be honest about your situation. Tell them you have a budget and know how much you can afford to pay each month and that you want to work with them on a re-payment plan. Ask them to reduce your interest rates and your monthly minimum. Tell them that you want to work on an agreeable solution before you miss any more payments or go to collections. Your credit card companies may report your repayment plan to the credit bureaus, which may affect your credit score, but it's still better than going to collections.

Finally, if you have a high-interest loan on a car, consider selling that car (if you can get the value of the loan) and buying a more affordable used option.

• Understand “good” and “bad” debt and how they work.

In general, good debt is when you take out a loan for something that is valuable and appreciates (goes up in value). Examples of good debt are student loans for college education and loans for buying a home (mortgages) or home improvement (home equity loans). Bad debt is when use credit cards and high-interest personal or consumer loans to buy things that quickly lose value — like clothes, cars, furniture, gadgets and vacations.

If you can pay the balance in full every month, it’s not a problem because you’re not building up interest. If you can’t pay if off each month, it’s bad debt.

Another thing to know about debt is that credit cards and loans are products that you purchase. So, before you jump into picking one, you can (and should) shop around and compare options so you get the best deals. Here are some web resources we recommend for comparing credit and loan options:

• Consumer Reports: www.consumerreports.org (loans and credit cards)
• Bankrate.com: www.bankrate.com (loans and credit cards)
• CreditCards.org: www.creditcards.org (credit cards)
• Mint: www.mint.com (an online budgeting tool)
• Finaid.org: www.finaid.org (student loans)
• College Board: www.collegeboard.org (student loans)

• Zero your balance every month.

Using credit cards can be a good thing. If you use them wisely, you start to build up your credit rating and credit score, which can help you qualify for things like a good home loan or car loan. The goal is to only use your credit card if you have money in your bank account to cover what you charge on credit. You need to be able to pay off the full balance every month, resetting your credit balance to zero. If you carry a credit card balance, make it your number one priority to pay it off as soon as possible.

• See also: Credit report, Loans

• Check your credit report every year.

Check your credit report at least once a year to make sure that your identity hasn't been stolen and you aren't the victim of fraud. 

• See also: Credit reports

Your credit report is where you can get a summary of your accounts and what your credit score is, and everyone has access to one free credit report each year. The three credit rating agencies — Equifax, Experian and Transunion — set up AnnualCreditReport.com for a free, trusted source for your credit report:

• Annual Credit Report: www.annualcreditreport.com
• Equifax: www.equifax.com
• Experian: www.experian.com
• Transunion: www.transunion.com

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Revisit this Essential during these Life Events

These life events are great chances for you to look at your debt and make sure you’re paying off your credit card balances and keeping both good and bad debt under control:

• Continuing your education
• Leaving school
• Going back to school
• Buying a car
• Planning a vacation
• Buying a home
• Getting married
• Starting a family

Next up: Invest, don’t gamble

You've mastered this lesson, so now it's time to learn about investing, not gambling.