For some, getting rid of outstanding debt, especially as they approach retirement, is a top priority.  For others, debt is an important source of liquidity while providing leverage for investments.  Here are five tips for managing debt in a smart way.

• Consider debt carefully.  The easiest way to manage debt is to avoid taking it on, so think twice before applying for new loans or serving as a co-signer on someone else's loan.  In particular, be careful about taking on debt to purchase a depreciating asset, such as a car.  Home improvement debt can be good debt if it will improve the value of your home, especially if it can be paid for via a Home Equity Line of Credit, where the interest is deductible.  However, some home improvement projects add little to the value of a home, and paying for these projects with a high-interest credit card that carries a balance forward each month is a mistake. 
  
  
• Understand Your Debt.  Ask questions to make sure you understand the details of your debt, like payment schedules, due dates, pre-payment penalties, late charges, and when the loan will be paid off.  It's also important to understand which forms of interest are tax-deductible and which aren't.
  
  
• Be strategic about paying down debt.  Always pay off loans with a higher interest rate first.  Making an extra payment each month can drive down your ultimate cost and pay off the loan sooner.  Rounding your monthly payments up to the nearest $100 can make a difference over the life of the loan.  When deciding whether to put extra money toward a home mortgage or car loan, pay off the car loan first, as the interest on the mortgage is deductible.  For built-up credit card debt, only a minimum payment is required, but that only pays the accrued interest and a small amount of the principal.  The less principal paid each month, the longer the debt is outstanding--and the more expensive it is over time.
  
  
• Use credit cards for convenience.  A credit card can be required to reserve a hotel room or a rental car and will demonstrate responsible borrowing behavior, which can boost your credit score.  By saying "I'll never have a credit card," you might be doing yourself a disservice.  The credit card itself isn't bad--if it's not misused. 
  
  
• Consider keeping some debt in retirement.  While it's not uncommon for people to retire once they've paid off their morgage, having some debt in retirement isn't necessarily bad.  Ready cash to cover unexpected health issues or emergency home repairs is important, and lenders usually require proof of regular income which can be problematic after retirement.  Keeping a line of credit open or putting one in place while you are still employed can be a smart strategy for an income reserve.