Not all debt is bad
Debt has gotten a bad rap lately, and for good reason. Recent NerdWallet data show that the average U.S. household with debt carries $15,762 in credit card debt and $130,922 in total debt, with the average consumer spending more than $2,500 a year on credit card interest. A number of well-respected financial self-help gurus even tout programs that advocate a cash-only, debt-free life.
So, should sensible people say no to debt? Probably not — because not all debt is bad. If you manage debt in a smart, planned way, you can exploit it to increase your wealth rather than let it use and deplete you.
How debt works
In simple terms, borrowing money is like paying for any kind of service. You pay to have a person to clean your house or fix your car, and when you borrow money, you pay for that service as well.
Lenders charge borrowers for the use of their money, and the more worried the lender is about getting paid back, the higher the cost. “Secured debt” is less risky for a lender — and costs less for the borrower — because an item of value like a house or car can be collected if the borrower doesn’t pay. When a lender has little or no way of guaranteeing payback — like with a personal loan or a credit card — debt costs more.continue reading »