Personal Debt

Is there such a thing as 'good debt'?

This section is all about debt, money you've borrowed and one day you have to repay, whether you like or not. Until you repay that debt completely you pay a regular interest charge which in percentage terms can range anywhere between reasonable to downright criminal. Unfortunately most people seem to have burdened themselves with unreasonable levels of debt at criminally high interest rates - and then they wonder why they can't get ahead. So, in this section I will cover everything about debt:  

Credit Cards - for most people nowadays the credit card has become a huge blocker to creating wealth. With todays consumerism people what to have the latest and greatest and have no reservations spending money they don't have for items that will only lose value. Yes, in today's world you need a credit card, but know yourself and be careful. 
 
Getting Out of Debt  - Ok, so you've gotten yourself in a mess, but you're here now and want to get out of swamp you're in. How do you do it? Well, you've got to really want it and get the discipline to see it through, but there are some things you can do  to make it easier for yourself like consolidating and renegotiating loans, getting better interest rates, get yourself a pay rise and more. I'm no expert in this area, but I've found consolidated some very useful tips and added a selection of great links to organizations and people who can help.
 
Good Debt versus Bad Debt - many of us have been raised to consider debt a bad thing, although current consumer debt levels would tend to suggest that this notion is waning fast.  
  
Consumer Debt Levels
 
 
 
 
 
 

Credit Cards

If you are a true modern day consumer you will have a wallet full of credit cards, many of these will be at their credit limit. You only pay the minimum monthly re-payment and during the period of low interest you remortgaged your house to pay for things you can’t remember and don’t forget, you bought that new car - with finance, of course. If you have read the book “The Next Door Millionaire” you will know what I’m talking about, if you haven’t - get a copy right now.
 
The debt level of consumers all over the western world is at a record level:
 
US:
Canada
UK:
Netherlands:
France:
Australia:
 
What should you use a credit card for? Whatever you like, just don’t let the credit run for much longer than the interest free period, which is typically 30 days but can be longer. After that you’ll start raking up interest charges pretty damn fast, for example:
 
US:
Canada
UK:
Netherlands:
France:
Australia:
 
I personally find this kind of interest rates criminal. So, pay them off and get rid of most of them. But keep one or two of your oldest cards as in many countries (like the UK and the US) your credit card history is used to calculate your credit score. If you use them for regular monthly purchases pay the balance each month and avoid the high interest.
 
As of 2004 the average American family holding a credit card had approximately $4,000 worth of debt on their credit cards. Even worse, the average rate of interest on this debt was an astronomical 17-20%. In early 2008, through fierce competition between credit card companies the average interest rate charged for a standard credit card in the US has decreased to around 13% but on average the amount owed has increased to $X,XXX.
 
Let’s look at an example, say John and Jane both have $4,000 debt on their credit cards, which require a minimum payment of 3%, or $10, whichever is higher. Both are strapped for cash, but Jane manages to pay an extra $10 on top of her minimum monthly payments. John pays only the minimum. Each month John and Jane are charged a 15% annual interest on their cards’ outstanding balance. So, when John and Jane make payments, parts of those payments go to paying interest and part goes to the principal.
 
Here is the break down of the numbers for the first month of John’s credit card debt:

Principal:
$4,000
Interest:
$50 ($4,000 x (1+15%/12))
Payment:
$120 (3% of remaining balance)
Principal Repayment:
$70
Remaining Balance:
$3,930 ($4,000 - $70)

The extra $10 a month saves Jane more than $700, and cuts her repayment period by more than six years! Every little bit counts. Paying twice your minimum or more can drastically cut down the time it takes to pay off the balance, which in turn leads to lower interest charges. If jane in the above example had paid $20 a month extra she would have saved a further $400 in interest and would have paid off the loan in just 6 years.

However, as we will see below, it’s wise not to pay only your minimum or even just a little more than your minimum. It’s best simply not to carry a balance at all.
 
When you do take a card out, check the fine print, some companies now actually charge their customers a penalty if they ay their balance off completely!

Responsible customers are not profitable.

Getting out of Debt

If you are in a real mess and need help sorting out your debt there are plenty of debt management or debt consolidation companies out there:

• American Consumer Credit Counseling
• Links…
• Links…

I have not personally used any of the above companies, so make sure you do your research and negotiate to get the best deal.

But before you go anywhere near these guys, carefully examine your situation and determine how bad it is. Make a detailed budget of all your income and expenditure and then determine your debt-to-income ratio. According to the American Consumer Credit Counseling (ACCC) lenders often use the debt to income ratio to determine your credit worthiness.

The ratio is calculated by taking your monthly debt payment (auto loan, credit cards, other loans, etc.) and dividing it by your total monthly take-home income and multiplied by 100%. The resulting percentage is your Debt-to-Income Ratio. Typically, lenders use Debt-to-Income Ratio percentages similar to those listed below to determine your credit standing:

Good debt versus Bad Debt

Is there really such a thing as good debt, isn’t it all bad. Our if you’re a credit junkie, isn’t it all good? The phrases “good debt” versus “bad debt” refer to the concept that if you borrow money to buy items that appreciate (i.e. increase) in value you can make more money than the interest you pay on your loan and so your creating additional wealth, that’s a good thing, by anybody’s book.
 
Bad debt ...
 
 
 
 

Consumer debt levels

The average American has 2.7 bank credit cards, 3.8 retail credit cards and 1.1 debit cards, for a total of 7.6 cards per cardholder, CardWeb.com said. About 18% of all personal consumption expenditures in the country are made on bank credit cards. Add in retail cards and debit cards and the figure rises to 24%.
 
The most unsettling aspect of all these credit card transactions is that many Americans dont see their income as a spending cap. About 43% of U.S. families spend more than they earn, according to a Federal Reserve study. And on average, Americans spend $1.22 for every dollar they earn, according to Myvesta.org.