Personal Debt: Guest Author

Mastering debt seems to be an underappreciated skill, one that certainly should be emphasized more to kids in school. I consider myself very lucky to have graduated without any student loan debt, something not a lot can relate to. As new graduates, student loan debt seems to be most people’s gateway to the realization of bills and loans. I opened a credit card before a lot of my friends, and thus have had exposure to debt and credit for a longer time than most people my age. Living in a new country, the United States, I was forced to start from the bottom of the credit ladder. Debt tends to be a word synonymous with fear and destruction. People like your Dave Ramsey’s of the world that preach zero debt is the key to financial freedom. On the other hand, you get the crowd that understands the power of debt, and how it can open new opportunities that would not be available without it. I think the definitions get smudged between leveraging personal debt and simply having debt. Therefore, navigating this road of mixed opinions on a seemingly crucial aspect of personal finance is something that I feel is valuable, and I think understanding and sharing my experiences and insight on personal debt can be helpful for others.

Let’s start with the most basic debt: credit card debt. Most people young adults today seem to have credit cards coming out of school, if not before. Credit cards serve as a foundation for building good credit, which can be very beneficial down the road when purchasing homes, cars, etc. For financially responsible individuals, credit cards offer a multitude of rewards. This makes using them an incentivized option, as you can build credit, earn points or miles, and still retain liquid funds for other purposes. As a credit card user, I have never made a purchase on a one that I could not have made on a debit card. In fact, I typically pay off my credit balance immediately after completing a purchase. I am always on the side of caution when it comes to debt. Pay on time, even early, because my purpose for a card was rewards and building credit. Over time, this allowed me to increase my limit, translating to a better credit score. Happy days. In reality, most people don’t operate like this. Credit card debt in the United States has reached the trillions, and when you look around at the economy it’s not hard to see why. High rates of inflation, plus a societal mindset geared towards consumerism and materialism has people drowning in debt they have no way of getting out of. It’s shocking the amount of people who have a credit card without understanding the basic terminology associated with it. Zero percent (0.0%) APR first year – a term banks love using. Mainly because they know anything 0% sounds attractive. However, people don’t tend to internalize the fine print that says 0% APR for the first year, and therefore do not understand the significance of compound interest on their card. In investment lectures, one of the first principles they teach is about compound interest, usually done to exemplify how one can grow their portfolio. Of course, this is correct, but maybe we should start teaching the dangers of interest when it comes to debt. Never mind damaging your credit score, which will have consequences later down the line, credit card interest rates are steep and unforgiving. One can dig themselves a deep hole without knowing it. I applied for a Chase Credit Card with 2 months of bank history and no credit history. Did they give me a credit limit that can be described as “chump change”? Sure. But it was easy to acquire. And I could get another if I wanted.

It becomes easy to see why this country’s credit debt is as high as it is. Banks are dying to hand out credit cards and it seems predatory if you ask me. I walk into a bank in my neighborhood to see people drooling to cash a $40 cheque so they can buy groceries. Banks seem to be more than happy to offer the golden solution of credit to these people. Might be my gut instinct, but the family who can hardly afford to feed themselves doesn’t need the additional headache of paying the bank back at 22%, but maybe that’s just me.

Taking on credit risk should not be as easy as it is made to be. I mentioned earlier, credit has the potential to open opportunities that would not be an option otherwise, but I struggle to see why most 20-year-olds would be in that boat. As a new credit holder, spending within your means should be drilled into your head. Getting caught up in debt, especially consumer debt, early can be very detrimental, especially when you factor in all the other bills you must pay. I’ve heard people say, “I used credit because I couldn’t afford to eat that week”. It is heartbreaking to hear someone be at that point, and how could I blame them, some have more than 1 mouth to feed. But this doesn’t make it better. What is my solution for that? I have a hard and a soft answer. Soft answer: nothing you can do other than try to increase your pay, whether that’s working longer hours, or finding a better job. Hard answer: cut back on your spending. Really evaluate what is getting spent. Credit is easier to spend because it doesn’t feel real, and that’s done intentionally. I think imagining whatever you have in your saving or checking account as the “be all and end all” is a healthier way to go about spending.

Debt is dangerous. No two ways about it. Managed effectively, it can be a powerful tool but from a simple google search we see the headlines of high consumer debt in America. Banks are handing credit cards out, and targeting those who need them. We need more education on debt, spending, and the effects of consumerism, or else the rising tides of debt will affect more than those who can’t afford to pay the debt back.

This article was written by Benjamin Cull. He is a graduate of St. Lawrence University with a BA in Economics and currently resides in NYC where he is a Research Associate at a consulting firm.  Feel free to check out his LinkedIn here.