The adage is old, but it still holds true today: if you have no debt and $10 dollars in your pocket, you have more wealth than 15% of American households combined. The truth about debt is that almost everyone has it and almost everyone struggles with keeping that debt balanced in some shape or at some point in their lives. American households carry a collective $11 trillion dollars or more in debt and the U.S. is more than $22 trillion dollars in debt. Generally debt is not something that has to sound so terrifying. Still, it’s one of the most terrifying things that exists for most people and it’s responsible for countless hours of lost sleep across the U.S.
What Is Debt?
Generally, debt is monies owed or due and must be paid back. Debt is the catch-all term for things like loans and credit cards that are paid back at a higher interest rate, but there are lots of ways for a person to fall into debt. Back taxes owed to the IRS, fines leveled by the state, late payments in default on standard bills, and various other monies owed are all unique examples of debt. Debt is generally split into two categories: good debt and bad debt.
Good Debt Vs. Bad Debt
Good debts are debts that will grow in value like a mortgage or debts that are imperative to increasing income like an auto loan. Generally if the debt is something that increases your wealth, portfolio or position, it’s likely a good debt. That means that student loans are generally considered a good debt because a degree should guarantee you a specialized position. In the same vein, there are debts that you might be able to justify as good debt that aren’t completely good debts. For example, if you must use credit to purchase a new suit in order to become more profitable at work, you might be able to call that a good debt.
Bad debts are pretty transparent. They are debts that do not add any value to your portfolio and end up costing more on average over time. While the above example of purchasing a suit on a credit card could be good debt, if you allow yourself to carry that interest from that purchase on your credit card and continue to inflate your debt, it’s going to be considered a bad debt. Credit card debt is mostly considered bad debt because many people carry high balances with astronomical interest rates and get stuck in the debt cycle. The worst offenders of bad debt are things like payday loans and things of that nature because they are nearly impossible to work in your favor and often result in you paying more than double in interest for something you could have purchased a different way.
Both types of debt have the potential to bankrupt you or become a bad investment over time. It’s also important to note that there are expenses and debts that sit in a gray area. For example, medical debt is necessary and it makes it possible for you to continue working and adding value to your portfolio, but it’s also unexpected debt that you can’t prepare for and could be devastating to your budget or your credit score if you default.
How Does Your Credit Score Work?
Your credit score is a 3 digit score that relates to how likely you are to pay back your credited debt. Typically this ranges from the very poor, very low end at 300 to the nearly impossible to attain 850. Credit scores are becoming increasingly important as they often relate to more than just the banks likelihood to give you a loan. If you have poor credit, renting might be harder, you might have to pay deposits on major utilities and you could be limited in your options when you need to borrow cash. Your debt has an effect on your credit score, since part of the report is based on your overhead debt ratio. If you are carrying more unsecured debt and not making payments, your score will go down. This is the brutality of the debt cycle. It can be hard to escape if you ever slide down, even if you are on your way to financial recovery.
Is Debt Insurmountable?
Debt is stressful and it can cause you to lose sleep, fight with your spouse, gain or lose weight or even develop health problems because of stress. However, there is a lot of focus on the dismal aspect of crippling debt and if you pay attention to the financial gurus, their language is codified in encouragement and possibility. You can escape from crippling debt and recover your sanity.
However, take their words with a grain of salt because while their strategies will get you out of debt, at the end of your recovery all you will be at is a baseline of zero. Don’t mistake that as dismissal. Being debt free is great, but there is another way to pay down your debts and recover the interest and principal over the life of those repayments to that when you have finally repaid the debt, you actually have money left over that’s yours.
A Smart Strategy To Deal With Debt
If you want to learn the process that can help you get out of debt and recapture the interest and principal over the repayment period, you need to speak with a wealth strategist at Factum Financial. At Factum, we help individuals, families and businesses to build a cash-flow system that gives them the power to accrue wealth, protect their money from taxation, and act as a banker for their money. Contact our office today to find out more information by dialing 480-525-8180.
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