Debt is a term that’s often referred to in the negative, even though in some cases it can help you reach your goals. Sometimes it’s the key to reducing high interest rates or getting something you need before you can afford it. So it doesn’t necessarily have to evoke fear or stress. Here’s a look at the two sides of debt and how the positive aspect can outweigh the negative.
Why Debt is Perceived as Negative
The word “debt” is probably more commonly associated with financial failure rather than financial success, even though debt can be a powerful vehicle toward success. While taking on debt to start a new business can eventually convert to wealth, running up credit cards for the sake of enjoying spending sprees can lead to years of headaches and heartaches.
Overuse of unsecured debt, which doesn’t require collateral, is sometimes a path toward bankruptcy, but it doesn’t have to be. The key to the difference between good and bad debt has to do with whether or not there’s a goal involved. Without a goal, debt can be a downward spiral, whereas a goal – such as investing in an education and career training – can have major benefits.
The problem with personal debt, though, is that too many people take it personally, which escalates stress and panic. They don’t necessarily plan on going deep into debt, it just happens because of unexpected emergencies or indulging too much in dining out and entertainment. Sometimes people run up credit cards due to the rising cost of living, especially for those who haven’t had a raise in a long time. Mapping out a budget is the main way to avoid letting debt get too far out of control. Conservation and restraint are important strategies that can reduce the negative aspects of debt.
How Debt Can Be Positive
Many people assume that starting a business requires huge personal savings. But if you happen to have good credit in your personal financial history, you may be able to get approval for a line of business credit that helps you buy the equipment and marketing you need to start making profits. People with bad credit can take steps to improve their credit score through debt consolidation, which may help repay loans faster.
Personal credit can be both a short-term or long-term solution to financial challenges. Even if you want to take weekend vacations or buy gifts for friends on credit, the pros will outweigh the cons if you carefully manage your debt with a payment plan. In order to get on the right path of using credit skillfully, you have to pay close attention to loan terms, such as interest rates and the consequences of late payments. Knowing this information and taking a calculated risk, as opposed to approaching credit with emotion, will help you navigate through the repayment process.
Interesting Debt Facts
At one time debtors prisons existed in the United States for citizens who failed to pay their creditors. These prisons were often work houses where inmates were assigned labor, a concept that had been around for centuries. Two signers of the Declaration of Independence, James Wilson and Robert Morris, did time in debtors prison for not repaying loans on time. Then the federal government discontinued debtors prisons in 1833. These days, however, it’s still possible in some states such as Illinois or Alabama for citizens to get arrested for neglecting to repay medical and other bills.
Consumer debt has risen to $3.87 trillion in 2018. Of that amount, over half is non-revolving credit, which means the credit cannot be reused after it’s paid off. This type of credit includes student and auto loans. Revolving credit, on the other hand, such as personal loans, allows you to reuse credit lines. Total credit card debt in 2018 has surpassed $1 trillion, beating a record set in April 2008 during the global financial collapse.
Credit card debt began to skyrocket after the Bankruptcy Protection Act of 2005, which created more barriers for individuals to file for bankruptcy. As a result, people began to borrow more to pay off bills. Lending got stricter with the passage of the Dodd-Frank Wall Street Reform Act. The average credit card balance among Americans in 2017 was $6,354.
Debt can be either good or bad, depending on the borrower, the lender and the situation. It’s ultimately up to you to control your finances, which is best managed through budgeting and setting goals. The ideal financial state is to build up savings that you can borrow against so that using credit is not that big of a deal. Savings provide a safety net for emergencies and become more powerful through growth over time. Once you’ve built sufficient savings, you will have access to a wider set of borrowing options.