Debt Is a Four Letter Word

by Sean Bryant on August 13, 2015

Debt is a four letter word

Some people fear the mention of the word ‘debt.’ It is something that most people have for many years of their lives. The reality is that the real estate market depends upon it because without mortgages the market would be just a small percentage of what it is today. It is clear that there is more to a successful financial base than avoidance of debt. Likewise there may be reasons why at any one time paying off debt should not be the main priority. The principles that are often followed in business to borrow money for growth are equally valid in private life. Bad debt is extremely negative in any cash flow and that applies equally well to individuals as it does to businesses whose very survival depends upon a positive cash flow.

Also Read: The psychological Effects of Being in Debt

Growth

Interest rates are relatively low at present. There are suggestions that they will rise but no one expects them to be too much higher in the years to come. Money on deposit does not produce much of a return though those with money in the bank are certainly better off than those that are struggling to meet their financial commitments. Those people who have a surplus each month have several different alternatives for those funds. They do include building up an emergency fund as well as making provision for retirement. The markets are another possibility and it makes sense to get professional advice as part of a financial strategy.

Investment in real estate is the way that many families build up their assets over the years. The mortgage debt is the means by which people can buy a property and see it grow in value over the term of the loan. That is the theory and most of the time it works. There are periods when real estate problems arise and the recession was a prime example.

Out of Control

The real problem when it comes to debt are the occasions on which it is out of control. A case in point was the credit card spending in the early years of this century when card companies aggressively marketed their products, attracting new users by offering 0% balance transfers and other introductory offers. Consumers responded by spending money they could not afford. Their logic tended to be that there was growth in the economy, job security and those balance transfer offers if their existing balances were getting out of control.

The recession brought a sudden stop to this complacency and the days of easy credit in general. Suddenly reality struck and even those who retained their jobs throughout the difficult years understood the need for self-discipline and a good budget. Credit card balances that incur a high level of interest applied each month certainly do not come into the category of good debt, that which works to the borrower’s benefit such as a mortgage that helps create assets.

Also Read: How to Negotiate Your Bills and Get Out of Debt

Loans

Once a credit card user reaches their credit limit and can only afford to pay off the minimum required each month, the balance will barely fall. That has two immediate consequences. The first is that their line of credit is effectively closed. Even more serious is the ongoing monthly interest that has to be paid. This adds up to bad debt and the answer for someone that has a regular income is to look at the rates on offer on today’s personal loans. They will be much lower and today’s online realistic loans lenders tend to take a positive view on applications. If the applicant has regular income and it appears he or she can keep up to date with installment repayments throughout the term of the proposed loan then the application is likely to be approved. A poor credit history is not a reason to turn down the application.

This is an instance when it is possible to turn bad debt, a credit card balance, into a good debt which is going to reduce monthly outgoings and hence provide a potential surplus. There is no reason to fear the word ‘debt’ as such. People can do their own research online to see what is on offer and then take their time to think about their circumstances and whether a loan can improve them.

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and his wife are avid world travelers. He enjoys spending time with his two kids and dog Charlie.

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