America Is Addicted to Debt
Debt, what was once frowned upon as an irresponsible act or circumstance of the less fortunate in society, is now embraced by the masses. Between consumer credit cards, bank loans, and payday loans, the average American now possesses an average of $9,200 in credit card debt with an average interest rate somewhere between 15 and 19 percent.
Debt is a lot more difficult to understand since we have gone from a predominantly cash-only society to an increasingly cashless society.
Since our evolution away from cash towards credit, we have developed habits that have put our society as a whole at risk.
Too much use of the plastic!
Financial Decisions Today Will Affect Our Family And Country Tomorrow
America’s credit addiction has left millions of families living with nothing left in reserve going from one paycheck to the next just trying to make there minimum payments. Many families use third party services such as payday loans to help make ends meet.
The growing fear of many experts is the future of today’s debt-saturated generation. The wide availability of credit and irresponsible borrowing has left consumers putting more money into interest rates on financed merchandise than their 401k’s.
With promotions shouting the availability of finance options like “No money down”, “No payments” and “No interest for up to 36 months,” consumers have a hard time passing up things they want but can’t afford.
Knowing The Difference
Debt used to be more clear-cut than it is today, which requires us to know and understand the difference between good and bad debt so we can make smarter decisions for our financial futures.
The following will help you determine the difference.
Good Debt
Good debt is usually defined by the simple fact that it’s going to provide some kind of return. By return I don’t mean better entertainment value such as that which is returned tenfold from the purchase of a brand new large screen plasma display or LCD television. I also don’t mean cosmetic value such as that returned by putting a fancy new pair of rims on your vehicle. By return we are solely talking about the financial return that is returned to you as a result of your financed transaction.
Types of good debt would include things such as borrowing money for a home or for a college education. These things make good financial sense. A home, although much goes to interest over the life of the loan, provides an equitable return with age and usually becomes the single greatest asset that a person owns.
College, on the other hand, can create years of student loan payments, but the increase in wages due to the college degree more than endorse this as good debt because of the profitable gain that will compensates for the original investment.
Bad Debt
Bad debt is just the opposite. You can usually identify bad debt by the lack of equitable return, such as a rent payment. Financial gain is never reaped as a result of renting a home or apartment. Consumer credit card debt is also a bad form of debt if it is not paid off in full each month, because credit payments continue to take from you without any comparable return.
The Gray Matter When It Comes To Debt
Sometimes it is hard to determine whether a financed transaction will be good debt or bad debt. A couple of examples of these gray areas would be car loans or payday loans.
Car Loans
Car loans and the like would typically be considered bad debt because they are in a constant state of depreciation. However, vehicles are an asset that most can’t afford to live without and may be required simply to get to work and get paid, therefore cars are a worthwhile investment. But purchasing one should be carefully considered.
When buying a car, it is strongly advised that you don’t buy one new off the lot as a newer vehicle depreciates much quicker than one that is a few years old. Plus an older vehicle’s taxes and payments are considerably cheaper, thus saving you more each month.
Payday Loans
Payday loans are another area which would fall into the “gray area” when considering good vs. bad debt depending on what they are used for.
Applying for a payday loan just to get some extra cash for a weekend in Las Vegas is a prime example of bad debt, but if you were to use a payday loan to avoid the fees on a late mortgage payment, a payday loan could save you money, which would make it a perfect example of good debt.
Make The Right Choice For Your Future
Remember the key is simply to determine the equity of the transaction. Will it save you money or not? Before you charge or finance your next transaction, try to determine whether your purchase would be considered good debt or bad debt.
Good debt will leave you in a better financial position for a safer, more stable and more profitable future.
I wholeheartedly agree!
Good article and good information
This is a good article with lots of great information. Having good credit makes life so much easier when it comes to obtaining things that you really want in life.
Your credit is your most powerful possession. Just like how car needs maintenance regularly to remain in good condition, it’s crucial to protect and properly manage your credit score. A lot of people, especially young starters, fail to recognize the importance of credit. As a result, they feel a hard twinge later on in their lives. People are experiencing severe financial struggles more than ever. It’s wise to practice smart spending habits and saving techniques. When you hit a hard patch along the way, avoid making an early withdrawal from your 401k. Although the IRA may allow you to take out an early withdrawal under certain circumstances, you could still be subjected to face a 10 percent penalty charge on the amount. Even still that money should be reserved to secure your future financial stability. It all comes down to being financially responsible and prepared.
Credit is your most powerful possession vkingston! I think people should be more aware of good versus bad credit and how you should handle the credit you have more carefully because it will follow you around for the rest of your life on your credit score!!
These are good reminders that will help
keep our finances in check.