What kind of debt are we talking about here?
In personal finance, the kind of debt we are always referring to is called “consumer debt”. This kind of debt has its own market and is its own industry. We as consumers use this debt to finance everything in our lives. The difference between consumer debt and any other debt is the context. Corporate debt and government debt are different from consumer debt, but they all have one thing in common; someone owes someone something. Corporate debt (in essence) refers to the money that is used to finance their operations or large projects. The same thing goes for government debt (municipal, state or federal). The consumer debt market covers everything from credit cards to personal loans and there has been a sizable increase since 2014. For example, the outlying debt for student loans in 2013 was 1.145 Trillion dollars. In 2018 that outstanding debt turned into 1.531 Trillion dollars. Oh yeah and not to mention, a sizable chunk of that debt (like more than 25%) is in default. Car loans are drastically increasing in size and that uptick is interesting to watch as well.
These debts are held by institutions and investors in what is known as a bond. I mean, bonds are their own can of worms that we will be aggressively opening later on *inhales*. Bonds are freaking cool and everyone always thinks that the stock market is worth more than bond markets but that could not be further from the fact. Man I can’t wait to cover that later on!
If I want to build up a credit score and become more attractive to potential banks, I need to prove that I can take on debt and pay it off. I mean, debt is what the American dream is about right? How else am I supposed to afford the lifestyle that everyone else says I should have? I can tell you that obtaining this kind of debt is not what anyone should do if they don’t have they don’t have the money to do so. There is a time and place for everything, and if you do decide that you want to have debt, you need to make sure you have the means to back it up. Taking on the small responsibility of having credit card debt will not only teach you how to better manage your money, it will also teach you how pointless they are to begin with. I look at a credit card as an instrument in which I increase my buying power and create a small source of passive income off of, while showing off my credit worthiness. A good portion of people think that it’s a good idea to get a credit car because it’s like right of passage or something. I think the only reason you should have a credit card is so you can improve your credit score and that’s it. Like it is so easy to make a transaction with your card and then instantly pay it off a few days later. And if you don’t, you can set up scheduled payments to avoid paying interest rates (on some cards). There is some debt that may be unavoidable, like a mortgage (don’t get me started), and that is okay I guess. But use a credit card as a means to get a better rate on that mortgage and not a means for you to buy whatever you want. Ultimately, if you do chose to use a credit card make sure you pay it off as soon as you can. You might be asking, “where does this passive income part come into play” of credit cards? The answer, cash back bonus. I use a Discover card as my preferred credit card, and the certain one I have, I get 1% cash back on all purchases and 2% back on gas and restaurants. Also, no annual fees and no interest if you make your payments on time. So if I already know I’m going to be making a purchase, why not use my card as a middle man in the transaction? If I can make a couple bucks on the side for purchasing something with my card I was already going to buy then why not do it? I guess it’s because it is tempting to buy more and more. I practice discipline, and within the first year that I had my card, Discover matched my cash back. So not only did I earn my own cash back, I had it matched!
I used my credit card to finance my schooling. I originally was just taking the money straight from my checking account, but one day when I was making a payment, I saw they took credit cards. I realized how amazing this opportunity was to build credit worthiness, earn cash back, and teach myself financial discipline all in one process. That same day I applied and was approved for my first credit card. Over the course of that year, every month I would make payments using my credit card and then instantly paying it off a few days later when the transaction was posted, I raked in the cash back bonuses. In all, I made $200 dollars (including some day-to-day purchases like gas and by the way, tuition was somewhere close to $1,100 per month for those who were wondering) just from using my card as a middle man. But things got even better when Discovered matched that $200 on the dot one year later I had $400 dollars total of cash back. After that promotional period they don’t match me, but I still get a percentage back which I still enjoy. Anyone who is paying for their college out-of-pocket on a monthly basis as they go, should really consider using this method to maximize their money earned. Just remember only do it if you have the money to begin with.
If you have to make purchases that you can’t avoid, think about how you can be making the most of it.
These are generalizations and meant to increase your understanding of the consumer debt market. Any advice contained within this blog is general advice and does not consider your objectives, financial situation or needs, and you should consider whether it’s appropriate for you. The information we are giving you is for educational purposes only.
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