Why Do We Have Debt?

by Kristina on October 14, 2010 · 9 comments

Many values that we live by during adulthood are installed during our childhood.  This also includes how we value money.  We are told that we should be financially responsible and we need to build good credit.  However, we are never told the importance of a good credit score; we are only told that it is important.  As adults, we know that a good credit score can help us get a mortgage, a job, an apartment, as well as the almighty credit card.

As a teenager, I thought that a credit card was a magic toy for adults that allowed us to buy anything we wanted.  However, I was never told about the repercussions or the damage that an unpaid credit card can cause.  I feel that along with cooking and sewing teenagers should learn about financial management in home economics.  After all, a home cannot run smoothly without clean finances.

As young adults our first form of debt may or may not be Student loans.  I personally had a VISA card before I had student a student loan. This is a mistake that I would caution other young adults about making.  The good thing about student loan debt is that it is controlled by our financial institution, our school, and/or the government.  Therefore all we have to do is use the money and make repayments once we graduate.  It is a smart and responsible way to create a good solid credit score.

Another very smart form of debt is through a Mortgage loan.  It is very responsible and a great financial strategy to have a loan that is secured with an asset. Mortgage loans are a good debt because the asset increases in value over time while the debt decreases.  Although mortgage loans are a smart form of debt, they are not the most common.

Credit cards are the most common and widely form of unsecured personal debt. If used responsibly a credit card can also help build a good credit score.  Unsecured debt should be used for one purpose and one purpose only, to help build and maintain a good credit score. We shouldn’t view credit cards as a cash advance on our pay checks or as a mean of income to make ends meet.  If we carry a balance on our credit cards we will end up paying more in interest fees over the long term than the actual money we owe.

What have you recently bought with your credit card?

Another common form of a loan which is secured by an asset is a car loan. I purchased my 2007 Honda Civic with a 5 year car loan through Honda Finance at a rate of 1.9%. A few months ago as I was trying to sell my car back to Honda they only offered my $9000 for my car when I still owed $13,000 on my car loan.  This is called negative equity; it means that we currently owe more on a loan than the asset is actually worth. I previously mentioned that it is a good financial strategy to purchase an asset with a loan.  It is important to make sure that the asset will increase in value such as a home, and it is not a depreciating asset such as a car.

Do you have any outstanding loans on assets?

(Photo By Wonderlane)

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{ 9 comments… read them below or add one }

1 The Everyday Minimalist October 14, 2010 at 8:49 am

We have debt because it’s expected that we do. Student loans, car leases, mortgages on homes.

I’ve never carried a balance on my cards but I had a lot of student loans, which was “normal”.

2 Honey October 14, 2010 at 12:06 pm

I have about $97K in student loans and about $2K in credit card debt (actually I am waiting on a reimbursement from work for $1K of that so the part that’s mine that I’m paying off is actually less than $1K). I’ve paid off about $15K in credit card debt over the last 2 years. There is also a $5K balance on one of my other cards but that’s a balance transfer that my boyfriend is paying off. We have a stable enough relationship that I don’t worry about it, and he’s actually raising my credit score because he pays more than the minimum every month! I am going to drive my car until it dies and never plan to buy a house, so no loans on assets.

3 Ramona October 14, 2010 at 12:30 pm

I’ve been in debt 2 times in the past years: first I bought my ex-laptop. It was 1000 euro and I didn’t have the money, so I took a credit for it. The good thing is I’ve worked A LOT on it for my web business and earned way more than its price and all the bank commissions.

The second AND LAST debt was for my car. Couldn’t get a new car with cash and also buying an old one wasn’t a good deal since we had an idiotic law in Romania back than regarding registration fees. For a 2000 Euro car or 3000 euro (something small to take me from one place to another) I’d have to pay almost as much as registration taxes. So the car loan was a better idea.

I took the credit for 4 years, have 18 months and it’s done.

Then I’ll be just “dandy”. I don’t like debt and will surely keep away from it.

4 Newlyweds on a Budget October 14, 2010 at 6:49 pm

We have about $2700 left in credit card debt, but I also have student loans and a car loan. BUT–I was so happy to learn I have excellent credit with a FICO score of 800! Never missed a payment and I’ve had a credit card since I was 14…guess I learned responsibility early!

5 Dave@50plusfinance October 14, 2010 at 11:05 pm

It’s true, they say never buy on credit anything that goes down in value. The things we need like cars are usually bought on credit because they are so expensive. Talking about habits learned as children, I can tell you my parents never had credit cards or mortgages. Maybe some business debt on large projects. But overall live on less than they made. It never rubbed of on me. First chance me and my siblings did was go into big credit card debt. How do you figure that.
My only debt is my house note, no credit cards just finished paying them off.

6 Tim October 17, 2010 at 3:19 pm

we carry debt, because it costs us far less to carry debt than no to. plus, without debt, the economy would not function, and i like a functioning economy. plus, for the most part in order to function in this world, you need some sort of credit history which requires some good debt at some point.

7 StackingCash October 18, 2010 at 2:07 am

Don’t assume real estate will always go up in value. In the U.S. real estate, even commercial, has crashed so hard that foreclosures and bankruptcies are commonplace. Be wary of a possible real estate bubble in Canada.

8 Matthew Denos October 18, 2010 at 1:45 pm

“I feel that along with cooking and sewing teenagers should learn about financial management in home economics”.
That is so true, Kristina. It is exactly what millionaire R.T. Kiyosaki emphasizes in his books (the “Rich Dad” series). Our educational system does not teach basic finance principles and it is so important that we get educated by ourselves.
The concept of “negative equity” is an interesting one. It reminds me of a case were one’s car is broken (not working any more) and yet he still owes on the car loan .

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