Americans love debt. The average American household has $6,643 in credit card debt, $9,786 in student loans, $7,690 in auto debt and $102,277 in mortgage debt. This sums up to a total of $128,442 in debt per American household (which includes other forms of debt, such as personal loans). This is a large amount of debt for Americans. With a conservative estimate of 5.0% interest rate on all of this, it accounts to about $535 in interest payments to lenders per household every month. A lot of Americans, still, do not understand debt, its impact on their personal finances or its tool to help one’s situation.
Debt is paying for goods and services today with money from tomorrow. Take a simple example of purchasing a house. You buy the house today but you are paying for it with somebody else’s (the bank’s) money. The cost of debt is covered more in detail in other articles but it is paid by interest rates. Lenders establish interest rates based off of demand and the likelihood of a borrower to pay.
The structure for consumers is the same as bonds for banks, which is covered in detail here.
Debt, however, is not a bad thing. For many, it provides the ability to consolidate their monthly payments onto one bill, collect rewards, purchase homes and cars and also to leverage money for greater growth (leverage is a topic itself which is covered here).
Credit cards in particular get a bad rap. But nobody needs to suffer by the hands of a bad credit card. A credit card is like a gun. In the right hands, it is a tool used positively but if used inappropriately it can be dangerous. Used correctly, credit cards provide free short-term loans, rewards and greater fraud liability. And, you don’t need to pay a penny for it if you do it correctly!
Lenders use a lot of different variables to determine the creditworthiness of a borrower. But, following simple, basic personal financial steps and strategies allows any consumer to get access to great credit and products for free.
There is a wealth of information on this site to understand how to obtain credit, from understanding a credit report, credit score, different forms of debt and budgeting information to ensure that debt is properly managed.