I know that it’s never a good idea to get deep into debt, and I am certainly going to do my best to keep my financial situation in good shape as I leave college and enter my career. But, to be honest, I’m a little worried. I’ve never been really amazing with my money, and I’m afraid that I’ll screw up and end up with a lot of debt. My question for the experts is: how big of a deal is debt, really? I know it’s bad, but is it something that you just can’t fix–a downward spiral that will ruin your life? Or are there ways out of bad financial situations?
Your concerns about debt are certainly understandable, but it seems as if you may not fully understand how debt works and why it is (sometimes) a bad thing. Let’s talk about debt in general for a moment, and then we’ll move on to discussing your question more specifically.
For starters, debt is created when we borrow money–but borrowing money isn’t always a bad thing. As you probably already know, borrowing money in the short term to pay for things that we don’t need is, generally speaking, a bad idea. Credit card debt fits this mold, and that is something that you will certainly want to avoid. When you use a credit card, the credit card company pays for your purchase and you promise to pay them back. But if you let the balance you owe sit for long, your credit card company will soon charge your interest–which can be significant.
You can pretty much always expect loans to have interest, but interest rates can vary significantly. So can the things that you can acquire with the help of debt. Taking out high-interest credit card debt to buy new shoes is a bad idea, but taking out a mortgage to buy a house could be a good one, depending on your financial situation and financial goals. Mortgage rates are lower than the rates on many other types of loans, and you’ll be acquiring a major and valuable asset–the house–in exchange for the debt you’re taking on. Other types of debt that can be perfectly reasonable include manageable car loans, which your local car dealership can help you find.
So not all debt is bad. But even good debts can become bad if you simply owe too much. If you can’t afford to pay off your debts, you’ll find that interest rates begin to mount and you feel trapped in a cycle: you’ll be barely able (or unable) to pay for the interest each month, leaving you unable to attack the principal of the loan, which in turn will mean that next month’s interest will be the same!
So what can you do? In some cases, it is possible to consolidate your debt into a lump sum. For instance, Australian home loan platform Lendi offers a debt consolidation calculator. In some cases, you may be able to move credit card debts onto one card, aiming for low interest rates and making a push to pay things off. Other times, you may want to turn to (reputable) debt experts to help you get out from under your burden.
These options won’t always work, unfortunately. Sometimes, there’s just no way out of debt other than bankruptcy–a legal option that helps people discharge debts and get back on their feet. Bankruptcy is tough on your credit, but it can help you put your life together after a rough financial time.
Be careful with debt! But, if you do get into trouble with your finances, remember: you have options.
“Empty pockets never held anyone back. Only empty heads and empty hearts can do that.” – Norman Vincent Peale