There
is hardly an adult in the United States that doesn't have any debt. The
amount of personal debt is increasing. It may be because credit has become
so easy to
obtain. Everywhere you go, you are
offered a credit card and a 10% discount. It can be so
tempting.
Credit card issuers used to look for
good, solid customers who could repay their debts. Today, however, many
card issuers are looking for those who will be slow in repayment and
charge a large amount. That way, the issuer makes 18-30% interest a year
on the account.
Debt can't be just lumped into a category as bad. Not
all is good, but not all is bad.
When used correctly,
debt can be beneficial in building wealth and security. CEO David Bach of
Finish Rich, Inc. says that it's what you buy that makes the difference.
"When you buy something that goes down in value immediately, that's bad
debt," he explains.
The difference is that good debt
produces money, while bad debt just costs money. If you go into debt
buying a home that will gain equity and increase in value, that's good
debt. A mortgage provides you with tax advantages and interest write offs.
And you have a place to live while your money is working for
you.
Home values over the last thirty
years have increased an average of 6.5% a year. When you buy a home, the
chances of it appreciating are good. Many advisors highly suggest home
ownership as the only way to go.
"The fastest way to wealth in
America is buying where you live," says Bach. "The average renter has a
median worth of $4,000, and the average homeowner has a median net worth
over $150,000."
Many advisors say that debts that
are tax-deductible and debts that increase wealth are good debts. Buying a
home or refinancing to get rid of excessive debts is a good use of your
credit. So is generating debt to buy high-return stocks, bonds and other
investments.
Bad debt is when you use credit to
purchase disposable items or durable goods using high interest credit
cards. If you don't pay the balance in full each month, the debt may
become overwhelming.
By using your card instead of cash,
you can really lose track of how much you are spending. When the bill
comes, you may be surprised. If you don't pay the total balance, the
additional interest charges make the item cost more. If you charge
something that is on sale and then aren't able to pay the balance off, you
didn't get such a great deal. You may pay for the item several times
over.
Every month that you only make a partial payment on
your credit card results in interest charges. The item you purchased
continues to lose value, while the amount you pay continues
to increase.
For example, when you purchase
clothes, the moment you walk out the door they depreciate by at least
50%. But if you borrowed to pay for them, you will not only pay
their original value, but also the added interest rate.
Unsecured debt, such as credit
cards, can affect your credit rating. You shouldn't have more than 20% of
your annual income going towards your unsecured debt. It will look bad on
your credit report, regardless of you payment history.
According to Michael Hirsch of
LowerMyBills your unsecured debt could result in higher interest rates all
around. "The recommended debt-to-income ratio is under 15 % to help you
qualify for the lowest interest rates possible when extending your credit
to buy a home or car," he says.
If something doesn't go up in value,
and you don't have the cash to pay for it - then you just can't afford
it.
Many people will open store credit
cards just to get the 10-20% discount off of the first purchase. That
savings is actually not what it seems. The high interest rate can eat up
the entire savings, plus more even.
While most of us have to have
automobiles, many people buy more car than they can afford. It is easy to
shop for the payment you can afford instead of the overall amount. Many
people can afford to buy a car, but not the car that they aspire to. The
financing on a car is often quite high considering it begins to lose value
the minute it leaves the lot.
For many people, a car loan is the
first loan taken out. While it used to make sense to borrow for a car with
a 6% and invest your cash in an account that yields 10%, the market has
changed over the years.
Most people have an approximately
$8,400 in credit card debt. This is accredited to the lack of financial
education available. Most people don't realize how credit cards are
affecting the way that they live. Paying more for less doesn't make
financial sense
