The Basics On Debt
Don’t have time to read the entire post now? Watch this video with the summary.
When it comes to money one of the most dangerous derailers, in my experience, especially in the US and other countries with elevated levels of consumerism, is debt. How many of you have been offered a credit card at the counter of Victoria Secret, Macy’s, Best Buy, etc.? Debt sales channels are ubiquitous and are no longer confined within the walls of Wall Street (yes, pun intended) or any other financial district.
There are two types of debt
According to the experts, we can classify debt in good or bad – as you know I stay away from concepts such as good/bad, right/wrong but for the purposes of this post we will use good debt and bad debt.
Good debt is debt that is used to pay for something that has long-term value and increases your net worth (such as a home) or helps you generate income (such as a smart investment or student loan).
Bad debt is debt that is used to pay for something that has no lasting value, like an expensive vacation, a fancy dinner out or a 65-inch TV.
For student loans you may find multiple schools of thought on where to classify this debt. Some think that it is ‘good’ debt because with a college education, at least in theory, you would generate higher income. Others think that you could attend a more affordable option for college (like community or state) or that you do not even need a college degree to generate income. Fortunately, there are ways to start putting money aside for college education so your kids would have little to no student loan debt after graduation.
Watch out for danger
Credit cards, like cash, are not inherently good nor bad. They have multiple advantages such as earning rewards you can exchange for travel, services, or products, are more secured than carrying cash, and some offer payment plans at no interest for certain large purchases.
On the other hand, there are disadvantages when using credit cards such as not tracking how much we are spending in real time, not seeing the value of what we are buying (i.e., it is easier to swipe or tap the card for a $100 purchase than actually handing in $100 to the sales clerk), and potentially spending more than our income.
When I started my money journey I still had a checkbook (yes, there was such a thing) and with it there was a check register. Because I did not want to overspend, I took the time to write down every credit card transaction on the check register as if the money was coming out of my account at that moment. This way, by the credit card payment due date I had the entire amount available to pay the statement in full.
A new player
There is a new kid in town, buy now pay later (BNPL), which became very popular during the pandemic and as the economy recovers continues to be a very convenient way to pay for products and services.
In essence, it is a short-term loan, usually paid weekly, without fees or interest (unless you default). And like credit cards, they are ubiquitous in both brick-and-mortar and online stores.
There are multiple risks associated with this payment type. If you default you will be charged interest and fees, you may not be able to return defective merchandise, and like credit cards, you may end up overspending.
In addition, because the payments are weekly and each transaction is a loan, you may lose track of when you need to pay each one. It could easily get out of hand if we do not keep an eye on it.
What to consider when making payment arrangements
When it comes to prioritizing debt payoff, start with those with higher interest rates, usually credit cards as they average 18% APR.
If you decide to make a payment agreement with the financial institution, be clear on the terms and conditions of the arrangement, how it will be reflected in your credit bureau, and what the tax implications are.
Do not be deterred by the person on the other side of the line or email. Ask all your questions until you are satisfied and clear on how the arrangement will benefit and impact you.
Similarly, if you decide to pursue a balance consolidation (BALCON) with another credit card, be clear on the fees, duration of the low or zero percent APR offer, and the maximum amount you can consolidate.
“Credit buying is much like being a drunk. The buzz happens immediately, and it gives you a lift. The hangover comes the day after.” Joyce Brothers, American psychologist
Having debt is neither good nor bad, right nor wrong. The objective is to make decisions about our money with our eyes wide open knowing the advantages and disadvantages of each choice.
Like other things in life, you may delegate or automate certain tasks or activities when it comes to managing your money. If you are part of a multi-adult household, one person could oversee handling the finances. And it is your responsibility to stay informed, to educate yourself, to ask questions as needed, and to take an active role in financial decision-making.
What other tips or considerations do you have when managing your debts? Please, let us know in the comments.
As a leadership coach, I enable talent to achieve bold goals with high standards. My mission is to help underrepresented women in the financial industry transition from mid to senior level leadership positions by creating awareness, increasing emotional intelligence, and unveiling the tools and choices available to them.