It is very unusual to find a person in the United States or Canada who does not have any debt on their shoulders. Because credit cards are so easy to obtain personal debt keeps on rising higher and higher every year.

Back in the days credit card issuers looked for reliable customers who would repay their debt quickly and on time. Today the business model has shifted in a different direction. Instead of looking for solid customers, credit card issuers look for those who repay slowly and buy often. These customers make the card issuers the most money by paying interest rates as high as 15%-30% percent a year.

No all debt however is bad. Some forms of debt can actually be beneficial and make you wealthy. The basic difference is in the things you buy.

Let’s look at the basics:

Bad debt goods are deposable items that drop in value the minute after you bought them (golf clubs, furniture, clothes). By using your high interest credit cards instead of cash it is very easy to loose track of these purchases. When you get your bill in the mail, you may be very surprised at how much you actually bought.

On top of this, when you only make partial monthly payments the interest keeps accumulating and the items you bought continue to loose their value.

Another bad idea is those store credit cards where you get a discount off your first purchase. The savings you think you are getting are not what they seem. The high interest rates on those cards will eat up everything you saved really fast if you don’t make the payments on time. Before you know it you may have to get a debt consolidation loan to help your poor financial situation.

On the other hand you have good debt which produces money and makes you wealthier. The most obvious example is your home. It will very likely increase in value and gain equity over the years. Plus the mortgage you get from your bank provides you with interest write offs and tax advantages and a place to live while it makes you money. The benefits can be seen if you compare a renter with a home owner who on average has roughly 40 times more net worth.

To sum up, keep you unsecured debt (credit cards) to income ration anywhere under 15%. If you want to buy something which will lose its value the minute you walk out of the store, make sure you have the cash to pay for it.

Posted in Debt