Is Debt Bad for You?

by Guest Author on · 2 comments

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Consumer debt has exploded in the past several years and it is worthwhile looking back to see just why. It is reported that nearly 50% of all marriages fight over money. It is among the leading causes of divorce

Until about the middle of the 20th century if you wanted to buy something that you could not afford right away you had to specifically apply for a loan. For example suppose you wanted to buy washing machine. You would go down to the merchant and select the model you wanted. And you would fill out a seven part credit application which would be submitted to the bank if you wanted to finance your purchase.

The bank would then decide whether you were going to get the loan or not. They had no credit bureaus then so it was individually determined. Assuming you got the loan the merchant would receive the cash and you would get the washing machine. You also received a coupon payment book. If you did not make your payments the merchant would have to pay the bank and repossess the washing machine. This was known as a recourse loan.

Consumer credit until the mid-fifties was very cumbersome indeed. We saw such things as Christmas clubs and layaway programs.

Originally plastic cards were known as "charge cards." You had to pay off the balance at the end of every month and they were used essentially for travel and business entertainment. Then, bankers decided to introduce a consumer credit card. To do so they had to sign up merchants who would accept the card and consumers who would have the card. This took a long time because most merchants had their own credit departments.

By the turn of this century nearly all merchants accept credit cards and all consumers have at least one of them. They have become known generically as "credit cards" because in truth they are simply a streamlined way to borrow money.

Research has shown conclusively that people will spend more money with their charge cards then they would if they had to spend cash. And this creates a problem. No longer do people have to put off something when they can buy it on the spot. Instant gratification has replaced discipline and savings. People tend to live beyond their means when they can just "charge it". The merchants sell more goods and the banks lend more money. They are not looking out for you!

Which leads us to a discussion of "good" and "bad" debt. Some advisers make this distinction. I believe there is no such thing as a good debt. For one thing it raises the cost of anything you buy on credit. I prefer to think that there is "necessary" and "unnecessary" credit.

Most of us need to finance our house with a mortgage. We also probably need to finance our first car and maybe our education. Disasters may be beyond our means to pay for out-of-pocket. Beyond those very few things most of our purchases can be put off until we can afford to pay cash for them. The benefit is that our money goes farther.

Be completely out-of-debt has advantages. It gives you the maximum number of choices for the money you have. You no longer have to use some of your paycheck to pay for things you bought in the past. Unexpected things are no longer a crisis but are a mere inconvenience because you can pay for them. Finally, being out of debt gives you a psychological feeling of well-being.

So, it pays to get out of debt! Your life will be richer and more satisfying.


 

Gordon Bennett Bleil is a financial educator, former banker, bank consultant, entrepreneur, business executive and business owner. He has been a professor teaching in MBA programs and he holds an MBA in finance from the University of Southern California. Gordon hosted a radio show in finance entitled The Path to Financial Freedom and has authored courses in personal financial management. He is renowned for his ability to present complicated material so that it becomes simple and understandable.

 

 

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Rakesh Narang August 22, 2013 at 9:06 am

I guess if money management is taught at an early age, it could help youngsters avoid debt when they start making money themselves. Our market, which is driven by consumers, does all they can (via advertising) to get people hooked to their products, and sometimes, it feels that you got to have that new Smartphone, even though you just spend hundreds of dollars recently. Debt can cause major troubles in life, but it’s not an evil, debt helps build homes and finance education, so it should be minimized, and kept for important stuff.

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Rakesh Narang August 22, 2013 at 9:07 am

I guess if money management is taught at an early age, it could help youngsters avoid debt when they start making money themselves. Our market, which is driven by consumers, does all they can (via advertising) to get people hooked to their products, and sometimes, it feels that you got to have that new Smartphone, even though you just spend hundreds of dollars recently. Debt can cause major troubles in life, but it’s not an evil, debt helps build homes and finance education, so it should be minimized, and kept for important stuff.
Rakesh Narang´s Last Fabulous Post ..How much should you depend on a Personal Exercise Trainer?My Profile

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