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DEBT

October 19, 2016

What it is.

 

No surprise here: debt is something you owe. The longer you take to repay that debt, the more it costs you. Time is money, right?

 

Where it comes from.

 

If we’re just looking at debt as money, then your debt comes from someone who has extra money. Those people with extra money don’t need to spend it and don’t want to spend it, but they also don’t want it just out there sitting pretty. They’d rather their extra money turn into more money. Smart, right? So they lend it to someone who doesn’t have enough money to buy what they want—let’s say you. And they put a price on this money and a price on the time it takes for them to see this money. You know what it’s called when someone’s vested in something. Interest.

 

The amount you have to fork over in interest each month depends on a handful of things. How much are you looking to borrow? How long are you going to take to pay it back? How often are you planning on making payments? Did you put some money down upfront? Is there some collateral? What happens if you stop paying? Why should you be trusted in the first place? Have you had to pay anyone back before? Well…so did you pay them back?

 

All of these questions boil down to this: This debt…are you good for it?

 

That’s where you credit history comes into play. Your credit report shows just how risky you really are. It’s one of those times in life you actually want to be boring.

 

 

Revolving vs. Installment.

 

Credit cards, loans, mortgages… You can rack up debt in different ways and for different things.

 

Credit cards are a form of revolving debt. There’s a limit on how much you can spend, but your balance may vary from month to month. So unless you’re a champ and pay off your balance in full each month, your required monthly payment will go up or down depending on how much you still owe. Be a champ.

 

Installment debt is usually your student loans or your mortgage. You have a set amount you pay at a set rate. You’re just paying your balance down to zero.

 

Why have it.

 

All debt isn’t all bad. Some debts are even good.

 

My student loan debt, for example, is an investment I made in my future earning potential. The interest rates aren’t outrageous, and I have a generous amount of time to pay them back. You don’t get to haggle with the government over what rate you’ll pay on these loans. They’re set by Congress. But you can know ahead of time what you should expect to pay and plan accordingly.

 

CURRENT AND HISTORICAL INTEREST RATES FOR STUDENT LOANS – Federal Government

 

Without my car loan, well, I’d be in a pickle. When an 18-wheeler totaled my 13 year old Ford, the driver didn’t check with me first to see if I’d saved up enough to buy a new one. (By that, I mean a used one.) I used my insurance check for a down payment and took out a loan for the rest, paying around 4% in interest.

 

 

Is 4% a good interest rate? For a car loan right now, yeah. Before you head into a dealership, though, it’s a good idea to go online and look at current rates. This way you’ll know what you should expect to agree to in your loan contract.

 

CURRENT AUTO LOAN INTEREST RATES - Bankrate

 

And a house? Well, I don’t have one of those. Don’t worry, I come home to a very rotund feline every night. It’s just not a place I own. [Neither does the cat.] Mortgages allow homebuyers another way to invest in their future selves. We spend a large chunk of our income on housing. With a mortgage you’re spending that money on a place you’ll own rather than a place someone else owns. And right now, mortgage rates are at an historic low.

 

I can’t wait for future history books to title this time period: Not a lot of Interest in the World.

 

CURRENT MORTGAGE INTEREST RATES - Bankrate

 

 

Credit cards are usually an expensive debt to hold because banks charge a pretty high interest rate, and you don’t have a lot of control over the rate you’re paying. If you’re paying off your card every month, though, you’re probably reaping more benefit than boon. Credit cards typically provide greater protection from identity theft than a debit card. It’s easy to dispute a charge, the credit card company will oftentimes launch their own investigation into cases of fraud, and you are likely to be reimbursed for any fraudulent charges. When banking information is stolen from your debit card (or your check…), the stakes are higher. A thief has immediate access to your cash balance. Depending on your bank, you may or may not be reimbursed. And there is usually a smaller time frame for you to report the theft to your bank in order to qualify for repayment. When you spend money with your debit card, you’re spending YOUR money. When you spend money with your credit card, you’re spending the credit card company’s money.

 

It doesn’t take a genius to commit identity theft. All you need is a skimmer at a gas station pump. So, a credit card may be a layer of protection you rely on. My car is one of those that needs gasoline. Before my sister’s wedding in January, I fueled up at an unfamiliar station and headed to the chapel. In the morning I received a text from Chase asking me to verify a charge. After I denied the charge, Chase called me. My information had been stolen. The thief had then created a phony card with my info. And now they were out West trying to buy McDonald’s (more than once). After a five minute phone call, I knew to expect a new card, and I didn’t have to worry about that phony buying a burger and fries on my dime. Good lookin’ out, Chase.

 

How to pay it.

 

Make it a habit to pay your credit card balance each month in full. Just because you CAN spend up to your limit, this doesn’t mean you SHOULD. Say you have three cards with a spending limit of $10k. If you only make $3,000 a month but max your cards out on a shopping spree, you’ll be paying pretty dearly for that debt.

 

Make your regular payments on time. It isn’t worth it to be late, and it dings your credit history.

 

Prioritize paying down high interest rate debt. I do this with my extra student loan payments. I don’t put the extra payments towards the loans at 3%. I pay extra on the loans over 6%. They’re more expensive. I pay extra out of my checking account, though. I DO NOT pay my student loans – even a student loan with a rate above 6% – with my credit card. Bankrate.com shows current variable interest rates on credit cards at 16.31%. I’d just be taking on more debt if I paid off a 6% interest rate with a 16% rate. There’d be no point.

 

CURRENT CREDIT CARD INTEREST RATES - Bankrate

 

Free apps for it.

 

Apps like Mint and LearnVest help you to keep track of when payments are due. They’ll also categorize your expenses and let you know how much you’re paying in interest on a credit card each month. It’s a pretty good motivator to pay your balance off in full each month. Wouldn’t you rather spend that money on yourself instead of paying the bank?

 

Ez Calculators is pretty neat. It has a number of loan calculators that’ll help you figure out payments and interest rates. It has a credit card minimum payment calculator that’s just a REAL fun way to see how many years it’ll take you to pay off the balance on a card if you only make the minimum monthly payments.

 

Walla.by is my favorite. It simplifies credit card points. Instead of having to figure out which card to use at a store to get the most points, you just open the app, and it tells you. If you forget to use it and pick the wrong card, it’ll let you know just how many points you missed out on. Won’t make that mistake again.

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