Radical Thoughts About Our Culture of Debt

This guest post is by Roshawn Watson who writes at Watson Inc on eliminating debt, investing money, and building wealth. Get his free eBook Your Foundation to Wealth by signing up for his email updates (no spam I promise). Get his RSS feed and connect with him on Twitter @roshawnwatson too.

Debt is one of the most aggressively marketed products in the world. It has permeated nearly every aspect of our lives. Even many churches are willing to accept offerings via credit cards, and Monopoly TM accepts credit card branding in their games.

The primary consequence is that debt is so ingrained into our culture that it hard for many to even conceive of purchasing a car or going to school without a loan. Unfortunately, consumer debts (i.e. student loans, credit cards, and car loans) such as these are exactly the worse kinds of debt to get into. These debts are designed to ensnare consumers into lifetimes of leveraged consumption.

Working for the Banks

If you are indebted to someone, with every payment you are increasing your lender’s wealth. Your debt is his or her asset. The longer you are paying it, the greater his or her return on investment. However, are you getting richer? Sadly, in many cases, the answer is no.

Let’s just look at the average American. The average credit card balance in America is nearly $10,700 ($200 monthly) with an interest rate in the mid to high teens. The typical car note is nearly $500 monthly. A standard student loan payment is about $250 per month. Of course, the list goes on.

Excluding the costs of necessities, such as food, shelter, transportation, and utilities, many Americans are already committed to paying at least $950 a month! It’s no wonder so many people feel trapped, they are literally working for the banks.

Imagine if these payments were converted into investments. If you received a very conservative return (7%), $950 could grow into a very respectable $2.5 million over a typical working life. However, instead of putting that $950 towards your financial freedom, it goes towards funding someone else’s financial independence. The price of debt is simply too great.

Debt equals bondage.

Pain of Paying Cash

Additionally, numerous studies have now repeated demonstrated that consumers who regularly use plastic for their purchases spend between 12-50% more (depending on the venue) than their cash-paying counterparts.

This phenomenon is known as the pain of paying cash. It is believed that direct loss of money causes our subconscious minds pain, so in an attempt to minimize the damage, we spend less. Thus, knowing that the money is coming out of our accounts serves as a motivator for us to spend less. By purchasing items on credit, there is a disconnect between purchasing and paying. With the financial pain is delayed to the end of the month, such as when one receives his or her monthly credit card statement, there is less motivation to curtail spending.

Also, by paying cash, you can get some phenomenal deals. I typically use this technique when purchasing cars. For example, I was able to negotiate the cost of my first car down 40% by telling the dealer that I was paying with cash. GM didn’t care that I was still a teenager or was at the dealership alone. All they cared about was that I had access to those greenbacks right then and was willing to take their gently used car off of their new car lot. I have used this strategy multiple times now. By having cash on hand, many buyers can gain the upper hand during negotiations and motivate sellers to accept their terms, provided that the terms are reasonable.

More than Just Money

In actuality, my criticism of debt goes well beyond money. At the root, it is really more about how we have been conditioned to think that the only way to solve our problems is through debt. In essence, the FICO score becomes our provider. It’s form of deification. Debt becomes our god! Financial guru Dave Ramsey says it this way: Do you worship at the altar of the great FICO? Before you answer that, consider this: if the only way you can see yourself living a comfortable life involves using consumer debt, then it is likely that you will always be in bondage to the banks. If you think you can or think you cannot, you are right in both cases.

Along the same line of thought, by keeping debt as an option to solve our problems, we often remove our ambition to solve them through other alternatives. For example, Henry Ford once commented that debt is the lazy man’s method to purchase items. Don’t diminish your ingenuity by settling for the “easy” way out.

Trust me when I say that when someone offers you credit, he or she is not giving you a gift.

Cash Back Bonuses

Nonetheless, some people are completely comfortable with using debt. Some people may even believe that they are getting over on Discover. For example, a common argument is I only use my credit cards for the cash back bonuses. I pay it off every month. The problem here is that that you are paying more for your items typically (see pain of paying cash). In the event of a job loss or sickness, do you have enough cushion via an emergency fund and non-retirement investments to weather an economic storm? Unfortunately, for many people the answer is no. The $50-$400 cash back bonuses aren’t enough to continue playing with snakes in my book, but that’s a personal decision.

The Big Myth About Credit

Lastly, people often say that their reliance on credit is to maintain or improve their standard of living. Ironically, they don’t realize that using credit decreases their standard of living. Let’s say you make $50,000 a year. This means your net (take home) pay is approximately $3125 per month (assuming 25% tax bracket).

Now if you are debt-free excluding your home, that means you likely have enough room in your budget to fund retirement and education funds, pay for reasonable housing, have fun, and give. However, if $950 of that $3125 is already committed to your creditors, the same income that had some flexibility (for someone who is debt-free) can become too rigid to gain much financial traction.

Thus, the person in debt has a decreased standard of living compared to someone who makes exactly the same income but has no debt. Additionally, the debt-free individual doesn’t have to deal with the stress of being in debt and has likely limited his or her monthly financial obligations.

In aggregate, debt makes arrogant assumptions about the future. It obligates tomorrow’s income today. Don’t mortgage your life and your family’s destiny for a new Toyota Camry. No car, dress, or Ivy League education is worth your financial freedom. After all, nothing is more precious than freedom.

Comments

  1. I don’t believe that it is debt itself that is the problem. It is the thoughtless accumulation of debt.

    In some circumstances, debt pays for itself. For example, school debt can pay for itself. Debt used to start a business can pay for itself. Debt used to get your teeth fixed can pay for itself if it helps you avoid even more expensive dental work.

    I agree that the heavy promotion of debt is a problem. There is huge money to be made in getting people into debt and there is little to be made in educating people about how to employ debt smartly. So there is an imbalance.

    Personal finance blogs could made a difference. We could serve the educational need that has not been well-served until now.

    Rob

    • Hello Rob,

      People often say debt pays for itself and that thinking allows them to get into trouble. For example, let’s take borrowing for school. Many people are borrowing for school and not realizing that upon graduation they will not have a job with what they signed up for.

      An increasing proportion of students are graduating from college saddled with such enormous debts that their economic future looks bleak despite earning the degree. A college education may provide the prospect of higher earnings, but what good is that if you need to spend the next 10+ years of your life trying to rid yourself of the debt first?
      See more here:
      http://genxfinance.com/2010/09/22/the-educated-indentured-servant/

      With regard to business, I am very much an entrepreneur but favor businesses that don’t require huge start up capital and can be bootstrapped. The majority of businesses require less than a $5,000 investment, so this can definitely be done but often require more creativity. Borrowing for businesses can easily magnify the errors that you make. I am glad all of my entrepreneurial endeavors required zero debt to get started.

      That said, you are right. There are plenty of worst reasons to get into debt than these two. Cheers, and thanks for the comment.

      • I tend to agree it is not the borrowing of money, which is the problem but irresponsible borrowing and irresponsible lending, and this is what has brought about the world banking crisis and the enormous amount of consumer debt. There will be a few more years of pain for consumers as they now have to get used to living within sensible financial limits, but it a very necessary pain.

    • Hey Rob,
      Thanks for the comment.

      I think a lot people use this rationale to get themselves overleveraged into debt unfortunately. I get your point, but let’s talk about your examples.

      Students: an increasing proportion of students are graduating from college saddled with such enormous debts that their economic future looks bleak despite earning the degree. A college education may provide the prospect of higher earnings, but what good is that if you need to spend the next 10+ years of your life trying to rid yourself of the debt first?
      For more, read my post here:
      http://genxfinance.com/2010/09/22/the-educated-indentured-servant/

      For business, I love for people to start businesses but favor those requiring low start-up capital. Most businesses cost less than $5000 to begin, and a lot of people should be able to swing that without debt (otherwise, you may not have a strong enough financial foundation to begin).

      Nonetheless, I understand your premise to be that we are the problem not the debt, and I couldn’t argue against that at all.

      Cheers, and thanks again for sharing your thoughts!

    • Hey Rob,
      Thanks for the comment.

      I think a lot people use this rationale to get themselves overleveraged into debt unfortunately. I get your point, but let’s talk about your examples.

      Students: an increasing proportion of students are graduating from college saddled with such enormous debts that their economic future looks bleak despite earning the degree. A college education may provide the prospect of higher earnings, but what good is that if you need to spend the next 10+ years of your life trying to rid yourself of the debt first?
      For more, I wrote about this at Gen X Finance last week (the educated indentured servant… I don’t think I can post the link).

      For business, I love for people to start businesses but favor those requiring low start-up capital. Most businesses cost less than $5000 to begin, and a lot of people should be able to swing that without debt (otherwise, you may not have a strong enough financial foundation to begin).

      Nonetheless, I understand your premise to be that we are the problem not the debt, and I couldn’t argue against that at all.

      Cheers, and thanks again for sharing your thoughts!

  2. “The average credit card balance in America is nearly $10,700 ($200 monthly) with an interest rate in the mid to high teens” I tried to find a source on that to clarify whether that’s $10,700 as the average total-statement cost, or whether that’s the average carry-over cost. It’s one thing if that includes those of us who pay for gas/groceries with the CC and then pay it off in full; that’s a completely different thing if that’s the amount people are paying high interest on.

    • Hello Gumnos,

      That’s a very good point. Some 40% of American carry a balance from month to month, and as best as I can tell this $10,000+ (from CreditWeb.com) figure refers to them (those with outstanding balances after payment). It is also important to note that it is an average, which is skewed upward by people who are more heavily indebted. Thanks for your comment and query.

  3. I just wanted to comment on your example regarding paying cash for a car and how it got you a lower price. I purchased my car with cash 4 years ago and I kept emphasizing how I was offering X amount in CASH, and finally my uncle pulled me aside and said, you can stop saying that. They don’t want you to pay in cash, they want you to finance the car, because they will make more money that way. A similar situation happened to another relative of mine last winter when they purchased their car (a significantly nicer more expensive car than mine) also in cash. The dealership was not excited to accept a cash payment and tried their level best to get them to finance something and still made them sit through several hours of solicitation from that department.

    So while I agree, it is better to buy your car with cash…these days it isn’t going to get you a discount, at least not in my neck of the woods.

    • Jamie,
      I’m sorry that was your experience. I have used it a few times in the last 8 years (once for a friend), and each time I was able to get at least a 25% discount. Sometimes it depends on where you are shopping, and I 100% agree that dealerships have an incentive for you to finance the vehicles. That’s where they make their money.

      • We bought our car with cash about a year ago. We got a screaming deal. Searching the internet we found the best deal and walked into the local place with the price.
        We did not mention the cash until the end.
        It was fun to write that check and drive away!

  4. I agree Debts is really a bondage. It usually the first thing that you think of when you wake up and the last thing when you go to bed. When I got out of highschool, I applied to tons of grants and scholarship, worked throughout college, and took out the smallest loans possible. I would rather work but the hours weren’t enough to cover all of the expenses. Although the debt isn’t much but I can’t take my mind off it until I pay it off. I planned to continue my education after graduating but then decided that I should work first to pay off my debts (including credit cards and personal loans). Now I am thinking about getting that advanced degree but the tuition makes me shuttered (why is it the debt always have more 0s and your pay check?). However, before I take on that load of misery, I want to unload my current misery. Education is really expensive these days. Even your heart wants you to go to school, your wallet fears that you will not be able to pay back the cost of that education. I think that after I am free from my current debt bondage, I will have to learn using the cash-only system to prevent accumulating more debts. It really does hurt more when you actually have to hand over your hard-earned money in physical paper bills. Several friends of mine, including myself, don’t really like to see our paper dollars bills that is budgeted for a week disappears in a day. But may be we should all learn to face this fear if we ever want to get rid of debts from our lives and minds.

  5. Wow! Slow down here for a second. I’m all against monitoring one’s debt load but you’re treading on thin ice with some of your assertions and claims.

    First, debt is a tool. When used properly it provides access to capital that would otherwise be challenging to build up. Many people don’t have the access to the capital to purchase a car outright, yet a car is what allows them to improve their financial position via a larger pool of available jobs (in most cities public transit just doesn’t cut it). A house is another example, I could have rented and thrown my money away for 15 years building up money to pay cash for a house or I could save enough for a down payment and start accruing equity over time.

    With debt I’m using my future income stream to acquire assets in the present and pay a nominal fee (interest) for doing so. The question is, does the return that I get on having that asset outweigh the cost of obtaining it?

    I appreciate you trying to quantify

    • You wrote out exactly what I was thinking (minus the comment about rent being throwing money away.)

      There are a lot of assertions in this article. All of them are ones I have read before (so not as “radical” as the title claims) and none of them are given evidence in this post.

  6. Sorry about that, not sure what happened but all of a sudden my previous comment was submitted without finishing.

    What I was trying to say at the end is I appreciate you trying to quantify what the future potential costs of debt are, but don’t use 7% return on investment as conservative return. Right now a conservative return is 1%.

    So long as you own your debt and understand how to use it properly it can be ok. Just don’t let it get out of control.

    • Hey Scott,
      The 7% return refers to a long-term return, and I do feel it is conservative and realistic given the data. Even during the last decade, if one did dollar cost averaging, rebalancing, and had a diversified paper asset portfolio with quality funds, he or she would have an annualized return substantially larger than 1% (but below 7%), and this has been one of the worse 10-year periods for the market. Of course, the financial experts and pundits tout the long-term average of stocks being in the 8-10% range, which is why I referred to it as conservative. Even if I’m half wrong, there’s still $1.25 million, which is a lot higher than the average/median net worth.

      That said, there are plenty who want to use debt as their tool anyway. It’s a personal choice, I was just stating my rationale for avoiding it.

      Thanks for your comment, I really appreciate your point.

      • Thanks for the response, but I still have an issue with using 7-10% as a benchmark. You’re assuming that you can put the assets into a long term investment class that could yield that type of return, however, you’re taking money that would have been earmarked for a specific purchase (house, car, etc). When you’re saving for a specific purchase it is usually best to be safe with your principal and that leads you to more conservative investment mixes like bonds, money market funds, CDs, and savings accounts where your yields are generally 2-4% even in the best of times.

        The way you calculate your 1.25M number is making the assumption that you never need that capital for these purchases. Remember the debt payments (student loans, auto loans, mortgage payments) are for physical items that need to be purchased anyways. You will need some amount of that capital to purchase those goods whether via debt or cash. You can’t take the entire debt stream and assume you could invest it all.

        At best, you should calculate what you would lose in terms of investment capability as the difference between rate of return on investment – interest rate payment. For example, an auto loan could cost me $2000 in interest over the life of the loan (5 years). Take that $2000 and invest it at 4% and what was my missed opportunity. That’s your real loss. For some, the value of having that car for the 5 years starting at day 1 is worth more than that $2000 + 4% return.

        For sure, there is a cost to using debt, but please be careful with the math you use to make your points. There are other factors you aren’t taking into account as well (such as the time value of money). Yes, we should all be mindful of our debt loads but debt can be used wisely as a tool for capital acquisitions (cars/houses) and income expansion (school). Where you get into more trouble is financing consumer products that provide no real return.

        • Steve, what I am suggesting is to adjust your lifestyle so that you do not have credit card balances, student loans, and car notes. If one has a debt-free household with a median income of $50K and reasonable expenses, I see no reason why he or she cannot save up for education, cars, and other expenses and invest $950 a month. Thus, you can put the $950 in more balanced investments (growth, growth and income, etc.) and put your other savings (for planned expenses i.e. for car, education, etc.) in more conservative investments/savings vehicles to protect your principal.

          Some will always use debt as their tool, so I realize everyone will not commit to this lifestyle regardless of the numbers. However, I stand behind the math. I think we are going to have to agree to disagree on this one.

          • All else being equal, someone saving $950 a month will end up better off than someone else paying that for debt payments.

            On the other hand, someone with $950 in debt payments because they got an education enabling them to earn 80K per year and a car that drives them to that job, in the long run will very likely be better off than someone who earns 40K per year because they refuse to borrow any money.

  7. I am all for eliminating our debt. Unfortunately hubby and I have a little bit of differing opinion on this, but working on it!
    Finding the balance between building the emergency fund, living within our means and paying off the cards without adding to them, thats where we are struggling. I would prefer to put all we can towards the cards, whereas he wants to save.
    The goal is to ultimately be completely debt-free and only use a card when it will be paid that month!
    Bernice
    http://bernicewood.wordpress.com/2010/09/24/10-ways-to-stop-being-so-busy/

    • Bernice,
      I know that it can be difficult motivating a saver to give up the security of saving. The only things that helped me 1) was realizing that lowering my savings rate was only temporary and 2)realizing how much I could save and invest once the debt was gone. Good luck with your journey!

    • Credit cards eat up big money in interest. Savings rates are horrible right now. Too bad it’s not the other way around. It’s hard to find decent places to park savings because the interest is so bad.

  8. Hello, I am a new reader here and I enjoy your articles. I grew up in a house (and a church) that taught that credit was pure evil and consequently, always paid cash for everything excluding my house and my car. That was up until a few years ago, when I learned the hard way that although I had a mortgage and a car loan which I paid on time religiously, I had no credit to speak of because I didn’t have any credit cards. I took out a card and began using it for purchases and paying it off every month. This improved my credit considerably.

    The lesson here is that not everyone is inclined to spend more when using plastic for payments. And NOT using a credit card hurts your credit. It seems counter to common sense, and certainly counter to everything I was taught, but there it is. A person who knows how to live within their means and follow a budget can (and should) use a credit card regularly.

    • Hello Jen,
      I do not doubt that there are others like you who live within their means and use credit cards. Only 40% carry a balance from month to month, so I get that there are people who are responsible. My primary premise is challenging the assumption that you need credit, and secondarily I am questioning whether people who use credit are getting ahead as much as they think.

      I operate on a cash basis; consequently, I have to have cash accessible and think creatively about some purchases. For example, how do you purchase a nice car without a loan? By working these principles for years, I have completely different strategies for living debt-free than many people.

      That said, I’m not coming against those who love credit. For example, while numerous data does exists suggesting that credit users typically do pay more though, fiscally responsible people such as yourself can absorb any additional costs as well. I do not see much danger in what you describe. My primary concern is for those who are not like you though, and those numbers are unfortunately growing.

      Thanks for you comment and telling your story!

  9. Great writeup RoShawn!

    I agree, and have lived credit card debt “interest” free my entire life (so far).

    I do have credit cards and use the rewards and benefits from having them. But I have never carried a balance where I would have to pay interest to the bank.

    I was lucky, but cause I was raised to respect debt and to try to avoid it as much as possible, and only use it if it benefited me greatly! Owning a car benefits me greatly because I don’t live in a big city, but if you are in a city, car ownership should be viewed as optional.

    I believe debt is just a tool nothing more, nothing less. The banks aren’t forcing me to use debt, I choose that path.

    Since I’ve haven’t paid interest on credit card debt ever and have a record for paying off my cars and house loans early, I am unintentionally the banks worst nightmare. (lol)

    There are a good portion of folks out there like me. I believe 55% of american either don’t are paid up fully on the credit card balance, or don’t even use a credit card (resource was a MSNMoney write Liz PulliamWeston, it’s old but relevant).

    I believe only 11% of the population have carry balances greater than $8,000, and that number was from before “The Great Recession”. Those numbers should be lower now.

    That said, we need to pull in our spending and stop trying to keep up with the Joneses!

    So, I agree with what you say and (so far) live it every day! :)

  10. Overall these are individual choices, but living within your means is the key. Using credit cards to finance a live style you can not afford will only lead to trouble. Simply prioritizing needs over wants gives you the ability to save for big ticket purchased like cars, college, etc.

  11. Having gotten myself into my fare of debt – I feel that there is plenty of blame to go around. You have personel responsibility – or lack thereof – as well as poor business practices from banks and financial institutions.

    Growing up in the 80′s I know I recieved zero education on credit, credit cards and saving for the future. That might have made all the differance in the world. With the materiistic pressures of today – it is easy to give in to the pressure when it is easy to “get it now and pay for it later – many times over”.

    I have learned my lesson.

    My world is built around CASH.

    Take care all –
    Rourke

    • @Sam Interesting point as usual.

      In this case, my primary concerns are: suppose your chosen career is no longer your primary focus (i.e. start a family or want to change what you do) and suppose you don’t graduate. These two pitfalls have caused a lot of students question the wisdom of overleveraging, extensive networks or not my friend.

  12. I’ve gone through plenty of cycles in my career. High income, low income, moderate income and everywhere in between. I’ve also been heavily in debt, out of debt, back in debt and now finally back out of debt. When using debt to accelerate consumption (eg, buying a newer car, upgrading the house, dates with a pretty girl, whatever), the moment felt great and rationalization of the debt spending was easy. The truth is though that those purchases are nearly always unnecessary and the long-term cost always outweighs the immediate gratification. Do yourself and your families a tremendous service. Avoid debt. Live within your means. Appreciate the gifts that God gives you in the moment, not the gifts you hope He gives you in the future. Life will be much simpler and far more gratifying.

  13. WOAH! That is a crazy statistic: The average credit card balance in America is nearly $10,700 ($200 monthly) with an interest rate in the mid to high teens. The typical car note is nearly $500 monthly. A standard student loan payment is about $250 per month. Glad I’m nearly as bad as those numbers!

  14. Hey Friend,
    I agree with you on the wide diversity of approaches dealing with debt and finances in general. I do feel that we, as a culture, are very permissive regarding debt overall. Along that vein, I see that people who have elected to live debt-free are often underrepresented and mischaracterized by the media, which is quite troubling. There are some who are living frugally and have eschewed consumer debt. Over the long-term, this population often builds wealth. It is this alternative and minority way of life that I wished to highlight in writing this post. Thanks for the comment!

  15. Roshawn, thanks for sharing your thoughts and candidness on DEBT. I’m one of those people who pays with credit (pay it off every month) for the cashback rewards and additional protection (dispute items, insurance) it provides me (yes, it happens to be Discover).

    While people may spend more and be disconnected with their obligation to pay, I feel it’s their personal traits that separate the spenders from the savers. A disciplined spender can take advantage of the credit card perks without overspending or paying any interest. :)

    • @KP
      Interesting point. I do agree that psychological characteristics are clearly important in differentiating between spenders and savers.

      Here’s a thought though: you say that “a disciplined spender can take advantage of the credit card perks without overspending or paying any interest.” I suspect that this discipline is unnatural for many credit card users, which is why many credit card users do spend more than cash spenders. Numerous data support this. In fact, I am unaware of any data suggesting that there is no difference. I wonder what fraction of credit card users are “disciplined.”

      I appreciate your insightful comment. Thank you.

  16. First, I want to second scott’s opinion about 7% return. 7% is not a conservative estimate.

    I hate debt, but happily took it on to get educated, buy a car, and a house to get on my feet. I look forward to the day when all of those are paid, but I certainly wouldn’t have the career or income without the school debt I took on.

  17. We are addicted to debt because it’s been the only way to get what we wanted without having all the money to pay for it. It has allowed us to buy more by leveraging our future earnings.

    I can’t say that debt itself is 100% bad because there are some that can handle their debt very well and save for retirement, etc. My wife and I are through with debt and we just pay cash or we don’t buy it.

  18. Wow, this is really an eye-opener. We see the same issues with debt in my country and, even if we’re new to all this, it is changing your life. We have friends who cannot afford to lose a job, since that would mean they’re out of their house, people who got into debt just to get some “more”, instead of trying to pay for something when they could actually afford it.

  19. The irony of this post is that anyone would think that avoiding debt is radical. Sadly, in today’s world, it is. An interesting tidbit: When asked, “What is the most important key to building wealth?”, 75% of Forbes 400 replied that becoming and staying debt free was the number one key to wealth building.

    Good job with this post and handling the comments Roshawn!

  20. I wanted to chime in again because I think there is a misunderstanding. Over and over again I see credit card use equated with debt. If a card is paid off on time every month, you have no debt! Nor are you paying more than the person using a debit card, because you aren’t incurring any fees. (Unless you have a card that charges an annual fee, which is a different story.) There seems to be a widespread belief that people who use credit cards are automatically enslaving themselves to debt, which simply isn’t true.

    As I stated before, and have stated elsewhere, I see a great movement among financial bloggers encouraging the use of cash only, and I understand why. Far too many Americans do not understand how to follow a budget and have gotten themselves into financial hell with credit cards. But the problem isn’t the card, it’s the user!

    Unfortunately, we live in a world where people cannot obtain car loans, mortgages, or increasingly, JOBS without established credit. So while I understand the motive behind encouraging people to forgo it, I think it is unwise. I would much rather financial bloggers emphasize how to set and follow a budget so they can pay that card off every month, thereby establishing credit without going into debt.

  21. Btw, when I say “pay the card off every month”, that doesn’t mean buy things now that you won’t have the money for until the end of the month. I put nothing on my credit card that I don’t actually have cash in the bank to cover. It that sense, it’s really being used as a debit card, but making one all-encompasing payment once a month. Credit card payments are tracked by credit bureaus, not debit card transations. That is why I use credit – to build up my credit score! Not to buy things I can’t afford.

  22. Excellent article.

    When people take on debt, they become servants to the debt. There are very few reasons why people should take on debt, but most of us do it regularly. Even folks who can’t stand debt often have mortgages (though not all)..

    If someone wants financial freedom, he or she would do well to eliminate debt as a first step. Without eradicating it. you’ll always be a servant to somone else. Even when you do become debt free, you have to save for your own retirement. That’s tough enough, isn’t it? So, why carry debt? It’s only holding you back from financial freedom.

  23. I couldn’t agree more with this accurate and passionate portrayal of debt as it relates to the average consumer. That said, in this article there is also an indirect but present implication that mortgage debt for housing is acceptable; and with that I disagree. I don’t believe in good debt, but rather that all debt is bad.

    I currently carry student loans and mortgage debt, and I hate both. Because of past decisions made in ignorance, I inadvertantly placed myself in the current position of being upside down in my mortgage. *sigh* I am trying to sell, trying to downgrade, but not having any luck as of yet.

    In short, people should hold all debt as servitude to the banks, and they should lower their standard of living to escape it in all forms!

  24. I think everyone should be cautious and thoughtful in taking out student loan debt. However, I also think blanketly advising against student loan debt is a bad idea. Take a smart, motivated kid from a family without a lot of money (in that middle class area where parents certainly can’t afford to pay $35k a year but also don’t get much in the way of need-based aid). Imagine that kid has worked hard in college and gotten a great GPA and LSAT score, worked as a paralegal, and really done their homework in terms of figuring out that law is their calling. Are they really better off turning down Yale Law School just to avoid debt? I’m not so sure. And I’m not sure society is better off with them turning down Yale Law School either – at the point when the top schools (which, remember, don’t give merit based scholarships) start to be populated entirely by people whose parents can afford to pay for it, we lose something, I think.

    That’s not to say I think our same, somewhat less motivated kid should take out the same amount of debt to go to a lower ranked school that carries a lot more risk as to whether you can get a job. Or whether a brilliant kid who isn’t sure that they want to practice law should take the debt to go to law school. But for some people it makes a lot of sense, and I think the same is true for medical school and some other professional schools.

  25. Hey Frugal Dad,

    My name is John, and I am the Communications manager for a company called Evolution Finance. I definitely agree with you about the unusual comfort many people have with taking out a loan in order to pay for school. I recently graduated from college and have many friends who financed their education in this manner.

    What I don’t understand is why parents who are comfortable financially make their children pay for school themselves, almost ensuring that debt from student loans will be incurred. It seems they want their children to establish financial autonomy, which is a good lesson but not at the expense of having the pressure of large amounts of debt at a young age.

    My friends were forced to work a great deal during college in order to chip away at this debt and, upon graduation, still had a fair amount outstanding. Such necessity to work long hours at well-paying jobs detracts from both a student’s study time and the extracurricular activities that perhaps define the college experience. Additionally, the need to make money makes it impossible for some students to accept unpaid internships that may be extremely beneficial to their desired career paths but do not help eliminate debt from student loans.

    • People have different levels of comfort and different priorities. The parents could be concerned about investing for their own retirement. Taking care of yourself (after you have raised a grown child) is not selfish or cruel IMHO. Other parents may also want to teach their kids the value of hard work. Surely, working can take away from the experience (i.e. extracurricular activities & unpaid internships), but it also can give you an additional set of skills and expand your network. I guess there are just multiple ways of looking at it the issue and divergent perspectives.

  26. There will always people who overindulge when something is available (especially if it’s easy to get –like credit). I think everyone should pay off their debt but I don’t go as far as Dave Ramsey in saying that credit should never be used… and my reason is purely from a practical standpoint. That is, the unfortunate truth is that there are too many organizations out there that will take a look at your FICO score before doing business with you… If you have developed healthy financial habits, it pretty easy to maintain a decent credit score without getting in debt.

  27. There is good debt which creates positive leverage. This can only happen if the thing you are buying with borrowed money returns more than the interest rate on the loan. Rental real estate, small businesses, and micro loans are examples. Primary residences, cars, furniture, and most installment debt is generally not good debt because the asset doesn’t throw off any cash flow.

    See more about borrowing at my blog: http://proborrower.wordpress.com/

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