Different Types of Debt… My Thoughts

hand drawn house, children art

I drew this myself. I am very talented.

This past Monday I published a guest post from the fine folks over at Debt.org, Good Debt vs. Bad Debt, in which the two were defined at a very high level.  The definitions were a bit on the simplistic side, however[1].  In truth, debt can be both a powerful financial instrument and a wrecking ball.  I have written about leverage and the debt to equity ratio before, so there isn’t really a need repeat myself like an angry Rain Man.  This isn’t meant to be a lesson so much as a sharing of my thoughts on the subject of debt.

 Debt as an Instrument

Debt is primarily an instrument by which individuals borrow money to acquire goods or services otherwise unaffordable.  I have used debt to attend school (the politics around the affordability of school and how affordable higher education should be is for another article), which despite my reluctance to call it such, was indeed an investment.  Much how a business needs a warehouse to store goods, I needed a higher education to attain the jobs I sought.  In this instance, debt was the financial instrument I leverages to attain my higher education.   If I could have paid cash I would have, but I couldn’t and so I borrowed.  The existence and availability of debt allowed me to attend.

 Consumer Debt

Consumer debt, usually in the form of a credit card, is where most people find themselves in the hot seat.  This is the type of debt that is not only the easiest to attain but also carries the highest interest rates, and so has the highest carrying costs and is thus the most dangerous.  Pending the individual, the existence of consumer debt can either be a wonderful world filled with bonuses and benefits, or a great danger to their financial wellbeing.  I fly to Colorado every year for free because of my bonus miles, whereas others struggle to make the interest payments each month.

 Impulse Control

The evilness of debt truly is in the eyes of the individual, much how money is the root of all evil (or is it?).  Impulse control is the driving factor for how debt is used.  Those with incredible impulse control tend to think out their use of debt far more methodically than those with the impulse control of Tiger Woods at Hooters.  They can pass on the opportunity to purchase on credit, often using credit where they could easily use cash and so avoiding consumer debt they cannot afford.  These are the people who fly around the country for free (and I am now dating myself).

 Irrational Hatred

I find that debt is unfairly knocked in the personal finance community, with those doing the knocking often times coming from a place of irrationality.  Let me first state: an irrational aversion to debt is not the same as having an irrational aversion of, say, computers.  Hating debt is limiting only so far as it prevents an individual from attaining their individual goals.  If someone is fine with being a lifetime renter or is very patient, then their aversion of debt and thus a mortgage is not a limiting factor in their life.   An aversion to computers will severely limit career options and the efficiency in which someone navigates the modern world.  Usually an irrational hatred of debt stems from a sour experience with it, and to this extent these people cannot be blamed for their feelings.  I would encourage them to view debt in a more complex light, however.  This will not make me very popular for saying.

Debt is ultimately an inanimate object—it is only in the context of how an individual manipulates it to achieve their own goals that it becomes good or bad.  This is largely a factor of psychology and the nature of the goals one has.   What is your mental state in regards to debt?

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[1] Not the fault of Debt.org, it is important to begin the conversation with a clear baseline and they did a wonderful job of this.

5 responses to “Different Types of Debt… My Thoughts

  1. couldn’t agree more! If you can get by on only cash, good for you. But you’re missing out on free rewards. So while you pay your plane ticket in hard cash, your friend is flying for free because she works the rewards system.

    • Agreed, however I do acknowledge that for some people paying in cash for most everything is just simpler, and cuts out the tendency to overspend. They are missing out, however.

  2. Enjoyed the post and came here from club thrifty. I too feel that debt, like money is an inanimate object that is not inherently good or bad. Most personal finance people tend to be pretty good with their own debt especially in the ‘frugalitish’ realm. I’ve seen debt be pretty harmful for a lot of people I know personally who don’t use it wisely. I think the pushback come from the fact that most people don’t use it wisely (see % of people who carry balance on cc) and for most it causes more harm than good. A lot of PF bloggers like it though because cc referrals are a major source of income. For me debt has been good but I don’t recommend it to many people. I’m looking forward to reading through all your post and I’ve enjoyed the humor thus far.

    • I am glad you like the site and thanks for the comment. Good to see that gig over at Club Thrifty is getting me at least some readership.

      Holly, FYI, continues to be my personal savior and deity.

      Let me know if you like any of the other articles, and be sure to share them.

  3. I’m all about staying away from consumer debt in the form of credit cards. I do want to own a home, though, and am not crazy enough to think that that will be possible without carrying a mortgage for a while. I also had a car loan for a while…even though I know it was a depreciating asset, the ability to buy a reliable car was such a better move than to continue buying beaters that bit the dust after some months. It’s all about being realistic and responsible.

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