What is Debt and why do we NEED it?
Debt; everybody has it, nobody wants it, but everybody needs it.
We NEED debt? Why would we need something that sounds so terrible? Those might be some of the questions you are pondering as you are reading this but, truth be told, debt is a vital part of your financial success.
The definition of debt is the state of owing money. Even that definition is cringe worthy, but what Webster’s dictionary doesn’t provide is the significance that debt plays in our everyday lives.
There are several ways to classify debt. One way is by defining if it is secured debt or unsecured debt. Secured debt is characterized by collateral. Collateral means you have pledged something as a security measure for the repayment of a loan. Unsecured debt is just the opposite. This kind of debt means there is no collateral.
Another way to define debt is by determining if it is revolving debt or non-revolving debt. Revolving debt is general lines of credit like credit cards. The characteristics are open ended loans that can be used repeatedly. Non-revolving debt, as you can imagine, is the opposite. This form of debt is closed ended loans and can only be used once.
Some of the debt we have is represented by the choices we make in life, but living a life without any debt at all, must mean you are a millionaire. Most of us are not financially able to pay cash for everything so that is where getting a line of credit comes in handy.
Let’s say you have driven the same car since you were 15 years old, you are now 26 and have a well-paying job and you feel that you deserve a nice new vehicle that reflects your personal style and income, not the 1986 Honda that blows a head gasket every 1,500 miles.
The vehicle that you have had your eye on costs well over the amount of money you can produce even with your well-paying job, and you really don’t want to wait another 20 years to save for the car you want, which will be less appealing by that point anyway, #thestruggleisreal.
You go to apply for the car and, low and behold, you get denied or require a co-signer. You are outraged. You haven’t lived with your parents since you were 18 and have been taking good care of yourself since, #adulting. You sure as heck aren’t going to call up mommy and daddy and ask them to co-sign for a vehicle you know you can get on your own.
So you decide to have a nice little conversation with the place that denied you. They tell you that you don’t have a credit score and they are unable to determine if you are credit worthy. Well, no credit score? You mean I have no debt? Well isn’t that a good thing?
So, to show them, you apply at every single financial institution you can think of and, the only one that will take you is charging you 20% interest with a high monthly payment, but hey, you got the loan! You get your nice new car and after a couple months realize you cannot afford the payment, the interest is absurd, and now you are 30 days’ delinquent and your beautiful new car is getting repossessed. Well you showed them….
Now let’s change this scenario a little bit. You still have your 1986 Honda and that well-paying job. You still think you are worthy of a new vehicle after sticking with that hunk of junk for almost 10 years.
This time when you were 21 years old you applied for a couple of credit cards. You are now a proud debt owing citizen. You started off small and got yourself a secured credit card. After a little while of having your secured card you did a little research and spoke with the people at your financial institution and decided it was time to go to the big leagues.
The debt you had before was minuscule compared to the massive amount of debt you just attained but, you are responsible with your debt. You take care of it like it’s a sick puppy and all it needs is love. You are now 26 and have had debt and a line of credit for 5 years.
You go to apply for your dream car and this time you are approved. You actually have a credit score, and a good one at that because you did such a good job at utilizing your debt and making sure you don’t debt and ditch (maxing out your card and then never paying the bill: coined by me).
You now have a brand new beautiful car to go along with your well-paying job and to put the cherry on top your interest rate is at 5% and your monthly payment is low enough to remind yourself how much you love your car.
Debt has the capability to make things hard but only if you don’t understand what it can do for you and how it affects you. So before you think debt can ruin your life, #debtsentence, take the time to understand it. Figure out what works best for you in all the different situations that may arise in life and find a financial institution that cares enough about you to make sure that your debt can and will serve you, not the other way around.
At the beginning of this I gave you the definition of debt, but what we too often forget is that debt is accrued with a line of credit. The definition of a line of credit is an amount of credit extended to a borrower. Now let’s take that a little further. Credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. Doesn’t that sound so much better?
Now, I am not saying everyone should rack up obscene amounts of debt, but what I am saying is that, if used properly, debt can be a tool you can use to obtain the things that you want in life.
Shelbie Murphy CUCE
Compliance Officer/Internal Auditor
Lassen County Federal Credit Union