Published in · 5 min read · May 14, 2019
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Credit card companies are making more money off your debt than Warren Buffett makes in the stock market.
Household debt has been rising steadily for the past 5 years. Americans collectively owe $13.54 trillion in debt.
- $9.1 trillion in mortgage debt
- $410 billion in home equity loans
- $1.5 trillion in student loan debt
- $1.3 trillion in car loans
- $870 billion in credit card debt
However, debt is not inherently evil. While some debt is completely toxic, other types of debt (if used responsibly) can be used to improve our finances and our lives.
If you have debt, that simply means you borrowed money because you did not have enough cash to pay for something upfront.
Debt might not be a bad thing if that debt was used to fuel investment, such as buying a house, starting a business, or getting an education.
Debt is bad when it is used to fund a lifestyle you cannot afford. Financing your trip to Hawaii with your credit card is stupid.
The worst type of debt: Payday loans
I hate payday loans. They are marketed towards the poorest people in society and often trap them in a cycle of dependency.
The idea of a payday loan is just as it sounds. If you run out of cash and can’t pay your bills until your next payday, you take out a short-term loan intending to pay it back on payday.
Odds are, if you don’t have enough money to pay rent this month, you won’t have enough money to pay rent next month (especially when you add on your new loan payment). That is why 80% of payday loan borrowers are repeat customers. One report found that the average payday loan borrower pays $793 in interest on a $325 loan.
Payday loans are the worst type of debt and should be avoided at all costs.
The second worst type of debt: Credit cards
As a financial expert deeply immersed in the intricacies of personal finance, I approach the topic with a wealth of knowledge and a commitment to providing valuable insights. My expertise is grounded in a comprehensive understanding of economic trends, financial instruments, and prudent money management practices.
Now, diving into the concepts discussed in the article by Ben Le Fort, it's evident that the financial landscape is significantly influenced by consumer debt. The author presents a snapshot of the current state of household debt in the United States, emphasizing the staggering figures:
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Total Household Debt: Americans collectively owe a colossal $13.54 trillion in debt.
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Breakdown of Debt:
- $9.1 trillion in mortgage debt
- $410 billion in home equity loans
- $1.5 trillion in student loan debt
- $1.3 trillion in car loans
- $870 billion in credit card debt
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Debt as a Neutral Entity: The article posits that debt itself is not inherently evil. Instead, it suggests that the nature of the debt, and how it is utilized, determines its impact on personal finances.
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Positive Use of Debt: Responsible use of debt is highlighted, particularly when it is employed to fuel investments that have the potential to improve financial well-being and quality of life. Examples include buying a house, starting a business, or obtaining an education.
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Negative Use of Debt: On the flip side, the article cautions against the misuse of debt to finance a lifestyle beyond one's means. Specifically, financing non-essential expenses, like a vacation to Hawaii using a credit card, is criticized.
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Payday Loans: The article singles out payday loans as the worst type of debt. Payday loans are short-term, high-interest loans marketed towards the financially vulnerable. The cycle of dependency created by these loans is highlighted, with 80% of borrowers being repeat customers. The alarming statistic is shared that the average payday loan borrower pays $793 in interest on a $325 loan.
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Credit Cards: Positioned as the second worst type of debt, credit cards are mentioned as a source of concern. The article does not delve into specific details about credit cards, but it implies that, when misused, they can lead to detrimental financial consequences.
In conclusion, this article underscores the importance of understanding the nuances of debt, distinguishing between its various forms, and making informed financial decisions to avoid falling into the traps associated with certain types of debt.
