There is a huge industry with billions and billions of dollars behind it trying to sell you debt. Between credit card issuers, car salesmen, appliance loans and payday loan companies, consumers are bombarded with offers of credit. But that credit comes at a cost -- and left unmanaged, that cost has devastated many American families' finances and bankrupted many businesses.
Common Sources of Household Debt
Household debt comes from a variety of sources. Debt on a home loan is often a family's largest single financial obligation. However, homes often appreciate in value over time, compensating for the debt. Cars, however, tend to fall in value -- yet car loans are another frequent source of consumer debt. Credit card spending and consumer loans to buy furniture and appliances round out the most common sources of debt for the middle class, while payday loan and rent-to-own stores frequently attract lower-income customers.
Price of Debt
Most debt in the United States has two price tags: interest and fees. Interest is the amount lenders charge for the use of their money. In essence, they are renting their money to the borrower for a period of time in exchange for a rate of interest. Common fees lenders charge are origination fees, processing fees, late charges and annual and monthly statement fees.
Consequences of Debt
When debt is used to finance the purchase of items that appreciate in value at or above the rate of interest, debt is not a bad thing at all. However, too many consumers frequently use debt to finance everything from groceries to meals out to vacations -- items that have no lasting monetary value. When this is the case and debt is allowed to accumulate, a larger and larger fraction of income must go to paying the interest and minimum payments on the debt, choking out more productive spending. The process is accelerated when the family experiences a loss of income because of illness or unemployment. Extreme cases of debt can result in default, bankruptcy, loss of a home and even divorce and suicide.
Debt Management Tips
Avoid using credit cards completely. Strive to pay cash, rather than borrow, in order to pay for cars and appliances. Look for secondhand goods. Avoid borrowing to buy items that decline in value -- you may be making payments for years with nothing to show for it. Instead, limit borrowing to finance items that have lasting value and which you reasonably believe will appreciate in value or generate an income. Examples include business loans to buy inventory, to start a business or to purchase property or financial instruments.
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