No doubt about it, some debts are worse than others. A collegiate student loan, for example, can pay off with a fulfilling, high-salary job down the road. That’s good debt.
But a credit card shopping spree at the local mall is forgotten within a week — save for the big bill you’ll get at the end of the month. That’s bad debt.
All told, the total amount of U.S. consumer debt reached $2.5 trillion in 2009, according to the Federal Reserve. That averages out to $8,100 to each U.S. citizen — adult or child. That’s scary debt.
How did we get into this mess? One reason is that consumers, way too often, absorb the worst kinds of debt. These are financial liabilities so worthless and so pointless that they can set consumers back for years with no redeeming value. Let’s take a look at some of the worst offenders.
Credit Card Debt. Yes, it’s no surprise that credit card debt is a major offender. But what consumers may not realize is the derogatory effect of paying only the minimum payment (or “partial payment”) on a monthly credit card bill. Let’s say you owe $10,000 in credit card debt at an interest rate of 18%. If you pay the minimum monthly payment (about 2% of the total debt for most card carriers) it will take you about 57 years to pay the debt off — and that’s assuming you don’t add any new debt.
Auto Loans. It’s no secret that the minute you drive your new car off the lot, it decreases in value (up to 30% according to most statistics). As new cars are depreciating items, it won’t be long before you owe more than your car is worth.
“No Money Down” Household Item Loans. Retailers love those “no money down” loans for things like new refrigerators or bedroom sets. Why? They’re betting that you won’t meet the restrictions embedded in the fine print. Most “no money down” deals state that you must pay the entire amount within a fixed period of time — like one year. If you don’t, the retailer invariably raises the interest rate on your loan substantially, virtually guaranteeing that you’ll pay way more for that refrigerator than you expected.
Groceries. Everyone has to eat, but using a credit card to pay for groceries is a big mistake. Food is a perishable commodity, and two weeks later, those steaks and that bag of M&Ms will be long gone. But the bill will be waiting for you at the end of the month.
“Pay Day” Loans. Where do we start with this one? According to PayDayLoan.org, the annual interest (APR) on payday loans is 400%. In addition, finance charges can cost up to $30 for each $100 borrowed. So, a $300 cash advance on a credit card would carry an annual interest rate of 57%, according to PayDayLoan.org. But a payday loan would carry an annual interest rate of 426%. Stay away — far away — from payday loans.
These aren’t the only examples of bad debt, but they certainly rank among the most egregious. Keep them at arm’s length and watch your back account grow accordingly.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.