For the next three weeks at She Spends, we’ll be discussing debt. It’s a complex issue, and finding a way to repay debt is even more difficult, which is why we’re devoting so much time to it. We’ll tackle it all over the coming weeks: student loans, mortgages, repayments plans, bankruptcy and credit cards. If you’ve got a question you’d like to see answered, please shoot an email to email@example.com. We want to tailor this space to fit your needs, so the more questions we get, the better.
For week one of our series on debt, we’re just going to talk about the basics. To start, what exactly is debt? Debt is a promise you make as a consumer to pay a person or a corporation back. In turn, they lend you money.
Most of us have experience with debt — it can be anything from credit card debt to student loans to mortgages. According to NerdWallet, the average American household has $134,643 in debt. YIKES.
For millennials, this debt is especially daunting - as college costs rise, we’re taking out more loans than ever before. In fact, Consumer Reports found that Americans are about $1.3 TRILLION in debt thanks to ever-rising student loans. As a result, some financial experts believe the next recession — or even financial crisis — will be caused by student loans.
It’s important to note, though, that there is good debt and there is bad debt. Basically, anything that will help you increase your net worth falls into the good debt category. This includes student loans and mortgages. When you take these out, you have a set repayment plan that helps keep you on track. Another type of good debt is a small business loan. Sometimes you have to take out a loan to rent a space for your business, or to set up a website. However, the loan issuer only allows you to take out that loan if they believe your business plan has a feasible way to repay the costs. Interest rates on these types of loans vary. Student loan interest is in the 3% to 6% territory on a federal level, for instance, while mortgage interest rates are slightly lower.
We don’t want to condescend, but we do want to make sure our readers have a clear understanding of how interest works. Interest is an extra fee loan issuers tack onto payments so they can make more money on their loans. If you fail to make payments, interest grows. The one exception is on most student loans. Students do not accrue interest on loans while they are in school. Once they graduate, students often have a set grace period before having to worry about paying interest. Meanwhile, mortgages start to accrue interest right away. We advise that if you take out a loan on ANYTHING you check out how you will be expected to pay those pesky interest fees.
Phew, that’s a lot. We do need to delve just a bit into bad debt. Bad debt is a moniker for loans used to pay for cars and for credit cards. Cars are included in this category because their value decreases from the moment you buy them. Thus, if you’re taking out a loan to pay for a car, you likely won’t see a return on your investment. Similarly, credit cards fall into bad debt because they typically aren’t seen as a way to pay for things that increase your net worth. True, credit cards are important because they act as a way to boost your credit score. But these loans carry interest rates north of 20%. If you fail to make a monthly payment, the next month you’ll have to not only pay for the items you bought with the card, but at a 20% price increase thanks to interest.
- Alicia McElhaney / She Spends Issue #4