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You’ve probably heard the phrase ‘consumer debt’ thrown around quite a lot, usually with a negative connotation. But what exactly is it? And is it actually bad? I’m breaking down everything you need to know about consumer debt, and sharing the deets on whether or not it’s actually bad. 

What is consumer debt? 

Consumer debt is money that you, the consumer, owe. There are usually two types of consumer debt.

  • Revolving debt (aka credit cards)
  • Fixed loans (usually a car loan or student loan)

Home loans (aka mortgages) aren’t usually considered consumer debt.  Seems crazy, I know. The theory is that your home will always retain its value. That’s why they’re considered a  personal investment into local real estate. I think that sounds pretty darn fancy, so I’m going with that definition of a mortgage 😉 

Is all consumer debt bad? 

It depends on who you ask. The personal finance expert Dave Ramsey is going to tell you that it’s always bad and that you should get rid of it ASAP. Many other personal finance experts will tell you that it’s more nuanced than that. The type of debt, the amount compared to your income, and what the interest rates are also determine whether consumer debt is “bad.” Let’s go into detail.

What are the interest rates? 

One thing to look at when considering whether or not consumer debt is bad is what the interest rates are. The interest rates for credit cards are often in the range of 20% APR or more, meaning that if you keep a balance of $10,000 on your credit card, by the end of the year you’ll have paid $2,000 in interest. That’s a lot. On the other hand, car loans are often more in the 4% APR range, so you’ll be paying much less in interest for this type of loan.  This is why credit cards are considered “bad debt” while car loans typically aren’t.

Either way, you’ll be losing money in interest each month that you have debt. The only question is how much money you’ll be losing.

How does it affect your credit?

If you’re not careful, having consumer debt can really hurt your credit. This might not seem like a big deal, especially if you’re not planning on going further into debt. But having bad credit can affect you in ways you might not expect, like buying that house when you’re finally ready to settle down. Having too much consumer debt and bad credit can also keep you from other financial goals, like going on that dream trip, visiting family for the holidays, or taking a pay cut for your dream job. 

But don’t I need consumer debt to build my credit? 

Like most things, the short (and frustrating) answer to this is… sort of

Your credit score is based off of several things. One thing that creditors want to see is a mix of revolving and fixed loans. That means they want you to have a credit card and student or car loans. Preferably both. But this only accounts for about 10 % of your credit score.

What matters more is that you’re paying all your bills every month and not borrowing the maximum available to you. If you can trust yourself with a credit card, feel free to keep that (or get your first). Just make sure that you pay it off in full each month. There’s a minimum payment (usually around $25 or so), statement balance, and current balance. The statement balance is what you want to have paid off in full each month. 

Is it actually possible to get out of consumer debt? 

The short (and happy) answer to this is… definitely. Doing so usually isn’t easy, especially if you have a lot of debt. Maybe you’re feeling like it will take so long that it isn’t worth it, or that it’s literally impossible. But don’t give up hope! You can do a lot more than you realize if you set your mind to something. Get educated and take what steps you can to start the process of getting out of debt now. That might mean you just don’t take on any more consumer debt while you work on paying off what you have.

So what are the benefits of having no consumer debt?

Maybe you’re not really convinced that it’s worth it getting out of consumer debt. After all, our society has pretty much deemed it as normal. Necessary even. Can you even survive without student loans and a car loan? And more importantly, is that even a life worth living? 

Here are some benefits of having no consumer debt. 

Job flexibility

Imagine that you see this amazing internship or entry-level position for your dream company. It would require a move and a pay cut, but it’s in a field you love and you’ve always wished you could work there. Can you take it? Not if the job means you won’t be able to pay your student loans, credit card bill, and car loan each month. With those three monthly payments, you’re forced to think more about the salary than whether or not you really love the position. Which is kind of a drag.

A great credit score

We mentioned this briefly before. Sometimes you need some consumer debt in order to build your credit. But usually your credit score just gets better and better the less consumer debt you have. The better the score, the more opportunities you have available to you. Maybe that means buying a house. Or it could mean taking out a small business loan and starting that business you’ve always dreamed of. Maybe it means having an edge in your application for that apartment downtown you’ve been eying. 

You can build wealth

So if you’re not paying money to pay off your debts each month, what would you even do with it? The short answer is “build wealth.” When your monthly income isn’t going to different bills each month, it means you can save it instead, whether it’s for retirement, a new car, or for a down payment on your dream home. 

Invest in yourself

If your extra money isn’t going to creditors, you can use it to invest in yourself. Maybe that means going on a meditation retreat. Maybe that means going to counseling once a week, or hiring a life coach. You could even use that money to go back to school and learn about the things that excite you. There are a myriad of ways you can invest in yourself. 

Invest in yours and your family’s future

Chances are, you’re probably not saving as much for your retirement as you could be. It feels like it’s some other person and their family that would benefit from that, not yourself. Realize that the more you save now, the more time your money has to grow over the years. The more it grows, the more you and your loved ones have. Imagine being able to pay for your kids’ and your grandkids’ college, or being able to start a scholarship program, or whatever it might be. There are lots of wonderful things you can do with money invested now.

A Final Note

Hopefully this answers some of your questions about consumer debt. In the end, money is just a tool for your life. The amount you have or the amount you owe doesn’t place meaning on you. The goal is just to use the tools given to us to the best of our ability.

Wondering what to do next?

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