Thoughts on Debt and Credit

Debt. Definitely a four-letter word.  And one to be avoided at all costs.  But no, not really.  Debt is simply another tool in your financial tool box.

When you go into debt, you have borrowed money with the intention of paying it back.  (Otherwise, it is simply stealing.)  Credit is a form of debt where you get the benefit of something now, and promise to pay for it in the future.    Credit includes mortgages, car loans, education loans, business loans and certainly credit cards.

The credit industry is very active and certainly very lucrative.  Count how many credit card offers you receive in the mail; notice how often you are asked if you want a store credit card; listen to the television and radio commercials.  In exchange for paying later, you agree to pay interest every month.  The interest can easily be 18% to 30%, or as low as 0%.  Meanwhile, a whole industry has sprung up to convince you that creditors are evil and that you should not have to repay your loans.

Let me just say it: Ridiculous!  If you are old enough and mature enough to get credit; you should be mature enough to handle it.  I’ve got some suggestions for repaying your credit card debts here, but let’s take a look at some of the different types first.

If you are considering  going in to debt, FIRST consider how long you will benefit from your purchase.

Mortgages allow you to buy a house before you can save the money to buy one (or even build your own.)  Typically, mortgages last anywhere from ten to thirty years.   It seems reasonable to go into debt for a lifelong home.  Be sure to calculate the mortgage, utilities and taxes in your budget before you choose your home.  Failure to pay your mortgage would be very serious to your financial health.

Education loans are another common form of debt.  Here you are pledging future earnings for knowledge and training for a future career.  But, be very wary of taking on student debt.  You may be condemning yourself to a lifetime of debt.  I know a young couple who are starting their married life with education debt exceeding a third of a million dollars.  Ouch. Teaching is a very noble profession, but teachers are notoriously low paid.  Take the steps you can to minimize your student debt now – community college; instate and commuter schools; work study programs; apply for scholarships and grants.  Education is so important; choose carefully and wisely.

Car loans have some very low interest rates to entice a buyer.  In our car dependent society, most people see a car as a necessary luxury.  We need them to get to work, grocery shop, school, the list is endless. If you do decide to purchase a car, remember that you are in control.  You choose the make and the model, and ultimately the cost of your vehicle.  I know young people who bought a car so they could go to work.  Now they go to work to pay for their car.  It is an endless cycle.  Choose a vehicle that will fit in your budget, and aim to pay the car loan off within four years. Once you do pay off this loan, continue to place the same amount in a separate account each month.  This will provide you with funds to pay for necessary car repairs or purchase a replacement vehicle in the future.

I saved store and credit cards for last.  This form of debt creeps up very slowly and bites you before you see it coming.  Going through the drive-thru every day for breakfast or out for lunch may only cost you $10.00 a day, but at the end of the month you will have spent over $300 and have nothing to show for it.  Pay a minimal $25 (which the credit card company is quite happy with, since you now owe interest on the remaining $275), and continue the same pattern and you will owe nearly $600 on your credit card. By the fourth month your credit card bill is over $1,000 and you still have nothing to show for your debt.  Add in a few store credit cards for clothing and other “feel-good” purchases, and you are on your way to being seriously in debt.  Remember, you are in control!!  By using your credit card, you have agreed to pay your bill with interest.  The first month you can not pay off your credit card is when you stop using your credit card. If you are not still benefiting from your credit card purchases that you are still paying for months later, then you should not use the credit card to pay for them.  This is the time to use cash for your splurges.  If you don’t have enough cash – you don’t buy it.  Be in control of your own debt.

Like a chain saw, credit is an incredibly powerful too.  It must be handled carefully, or it could destroy your financial house.

 

 

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