To Debt or Not to Debt: That Is the Question
for a lot of young folks, debt is a part of life
I can remember sitting at my desk in my first apartment applying for my first credit card. I had just graduated college. I was working full-time. I asked myself, “What could it hurt to get a credit card?” It’s just what you do, right? I believe the limit on the card was $500, so I thought that the payments should be no problem. This is where my thinking fell short. Little did I know that this would be a defining moment in my life: one that would haunt me for years to come. One credit card became two. Two became three. Three became four. And so on and so forth. Before I knew it, my credit card debt alone totaled over $20,000. I was spiraling and drowning in debt. Fast forward ten years. I had had enough. My debt was consuming me. I sought counseling and asked for guidance. I also read numerous books and articles to educate myself on how to dig out. Now, while I am not a professional financial advisor or planner (and don’t claim to be), I can say with certainty that I know what NOT to do with debt as you enter adulthood.
Clearly, debt is no joke. It has many nasty side effects. It can cause severe stress on your body. It can negatively affect your relationships. It can prevent you from getting a promotion at work (yes, this is can happen). It can hold you back from living your life.
My first fault as I completed that credit card application was thinking in terms of payments. With credit card debt especially, it is in your best interest to ask yourself if you are willing to pay an additional x-number of dollars for that item, experience or whatever it may be. For example, say you make a purchase of $1,110 on a credit card with an APR of 20.24%. The minimum payment is $25 per month—seems doable, right? Maybe. If you make no additional charges to that card and pay only the minimum, it will take you 7 years to pay it off AND you will have paid an estimated additional $868 in interest. So, while the payments seem doable, was the purchase worth an additional $868 and payments for 7 years? This is the thought process you need to have as you navigate taking on new debt. Perhaps you intend to pay the balance in full, which is great! But, if you plan to pay just the minimum, ask yourself if you are truly ready to take on that debt and all the baggage that can come with it.
This is much like buyer’s remorse, except that it comes with a special gift at the end of each month if your balance is not paid in full—interest. Interest is a revolving door. It’s easy to get stuck in the vicious cycle of minimum payments, interest, additional purchases and what seems like, never-ending payments as the shackles of financial hardship tighten. Oh, and if you are one to hold a revolving balance on your credit card(s), you will quickly become the credit card company’s favorite customer. I can tell you from experience that these credit card companies will likely not work with you, even when you are drowning. I have never missed a payment in my life (knock on wood). So, I thought this would be to my advantage when I reached out to the credit card companies to discuss my options. I was wrong. I was told that because I have never missed a payment, there was nothing they could do for me. Until I missed a payment, I would not qualify for any of their financial assistance programs. They must be joking, right? Nope. They were dead serious.
Just as with adult beverages and drinking responsibly, you should also debt responsibly. It is important to understand “good debt” versus “bad debt.” The main difference is value. Think of good debt as an investment. Bad debt, on the other hand, typically carries a high interest rate and is acquired when purchasing items that quickly lose value. Examples of good debt can include a student loan, mortgage or home equity loan. Student loans increase your value as an employee and raise your earning potential – it is an investment in yourself. With mortgages, not only are you providing yourself a place to live, you are able to deduct the tax and interest you pay on the house. And, your home often increases in value over time. Finally, home equity loans allow you to tap into the equity on your home. Borrowers often use these monies to fund home improvement efforts, pay tuition or pay off credit cards with a high interest rate. For all three of these examples, the interest rate is often lower than other types of debt, which frees up your money for emergencies and other investments. Filling up on delivery pizza on a high-interest credit card, on the other hand…
Whether a debt is “good” or “bad,” you still should be prepared for the negative consequences that can arise. You need to think about what you would do with your debt if your situation were to change. What if you (and/or your significant other) lose your job? What if you have a medical situation arise that racks up a mountain of bills? What if your car dies? You need to be prepared for the worst-case scenario. Have a plan. And most importantly, before you acquire any debt, read the fine print. Be aware of the creditors rights, as well as your own.