Friday, December 09, 2016

Understanding Debt

by Mary Steamerson
 

What is debt?
Debt means what you owe to someone or to some company. It is something you borrow from a person, lending institution or a company, particularly a bank, for whatever purpose. E.g. paying your electric bills, rent, water bills and for buying food.
Often we borrow money from another person because we desperately need to pay our bills due to reasons outside of our control, like Google unfairly penalizing our content

    The average family in the United States has $16,211 in credit card debt.


When we use the term "average family" that means e.g. a husband, wife, maybe a teenager all with credit cards. It is not the average individual credit card debt.

If we need a larger amount of money, then a person may consider borrowing from a lending company at a certain interest rate that is payable either daily or monthly. We can also borrow money from banks through their personal and commercial loans.

Today, most banks offer credit cards – with repayments ranging from one month to a couple of years. All of us come face to face with the allure of debt, particularly consumer debt like credit card debt, car loan, and other personal loans. Credit is important and useful at times, especially when used as leverage to earn more assets or if you want to purchase a house.
However, when misused or abused, debt will surely cause trouble and is terrible for those who mismanage it. Debt problems may seem harmless at first because credit card companies may give you a large pre-approved credit limit and free annual membership.

Primarily, we think of subscribing for a credit card for “emergency” purchases. However, this is not what happens most of the time. Like for example, you wander through the mall and find out that they are having a sale on most of their items. And here you are, bringing the credit card with you, and so you are tempted to buy many items using your credit card. This comes with the thought of paying off the entire amount as soon as the bill arrives.

Before you know it you have racked up so many charges that you can only afford to pay the minimum amount due each month and you are paying very high interest rates so you feel like you can never pay off your debt. If you are already encountering this debt problem, it is time for you to think of better solutions to pay off your bills. You should consider borrowing money from your relatives or friends at lower rates if possible. Or sell some of your assets that you no longer need and use the proceeds to pay off your debts. If not, you may also consolidate your debt with one lender that charges the lowest interest rate.

After you’ve zeroed your debt, stay debt free. The best way for this is to avoid temptations and occasions of potential spending. Like for example, visiting shopping malls frequently, and if not, leave your credit cards at home. You should consider managing your finances in a similar manner as trying to lose weight. The first step is to see how much you currently weigh – that is, you should know how much you owe and what kind of debt you need to pay. The simple reason for this is that you need to know if you have enough cash to pay for a certain debt when it falls due. In addition to classifying your debt according to maturity, you should also take a good look and identify which debts are necessary and, which are not.