According to an article in The Oregonian recently, about a third of Americans are facing debt collection! If you are one of the three facing this debt crisis, here are a few tips on how to control your debt.
Why is that? Why do so many people, according to the article...1 in 3...have debt issues. Notice, the article didn't say they just had debt, the article stated that 33% of Americans have DEBT COLLECTION PROBLEMS.!
While I am not in favor of carrying too much debt, there is a difference between GOOD DEBT and BAD DEBT.
For example, for most people, it is almost impossible to buy a home without incurring debt. Depending on where you live, a home will cost around $200,000 these days (some more, some less). With so many of us just trying to pay the bills, much less save any money of significance, if you want a home, your going to go into debt...for a long, long time!
But I believe having a mortgage payment that you can afford (and that's another whole story) is not actually a bad debt but rather a good debt. In the long run, most home will appreciate in value.
Sure, we all are still coming out of the home mortgage fiasco over the last several years, where most home values in America plummeted. But, if you look at the history of home values, for the most part, they go up over time.
So, when you send in your mortgage payment, yes, a very large part of the payment is going to interest and very little to the principal in the early years, but you are in part, paying yourself.
Let's say you have a home that had a purchase price of $185,000. You were able to qualify for a loan and after 10 years, the balance on your mortgage was about $140,000. At year 20, the balance should be around $80,000.
But, if your home appreciated at about 5% (could be higher or lower) each year, your home could now be worth approximately $475,000!
That's a good use of debt!
On the other hand, what about a automobile loan?
Most people rent homes and buy cars. Sure, I understand that it is much easier to qualify and afford a car payment vs. a home mortgage, but let's think about that for a minute.
You see the ad on TV and convince yourself that you need, deserve, it "just makes sense" to go out and buy a new car. Yes, your old "clunker" barely runs and needs a couple of thouands in repairs, but does it make sense to spend $2,000 to repair the PAID FOR car or spend $20,000 or so (of debt) for a brand new car)?
Cars DEPRECIATE! That simple means that every year you own the car (I'm not talking about exotic or collector cars), the value goes down.
If you haven't experience it, you probably know someone who bought a new car (they didn't buy it, they started making payments on it) and for whatever reason wanted to sell or trade it in.
While the original sales price was $20,000, and they had been making payments of, say $375 each month for the last 3 years (on a 5 year note), the loan balance is about $8,600, but the value of the car is only $10,000- $12,000.
Let's say they sold the car (usually much better than a trade in) for $11,000. They had made 36 payments of $375 or $13,500:
Total of payments $13,500
Sale price - 11,000
Net profit/loss - $ 2,500
That looks like BAD DEBT to me!
Now, I'm certainly not an expert and there are plenty of sites available to check out, but what do you think about this...
Rather than purchasing a new car at $375/month and seeing it's value go down, down, down... you saved $375 a month. OK, try to stay with me on this:
You BORROW (friend, family, bank) $2,000 to repair you current car.
Pay back that loan at $375/month for about 5.5 months.
Now you start saving the $375/month towards purchasing another car 3 years from now.
At only 2% (now much paid in savings interest these days) after 3 years, you should have close to $16,000!
You sell the old "clunker" for at least a $1,000 and now you have $17,000 to pay towards another (most likely not new) car. You will be amazed at what $17,000 can when talking about cars!
I don't even want to start talking about Credit Card Debt.
I've been helping people with too much credit card debt for over a dozen years now and I believe that there is only one instance I could recommend using a credit card.
If you are have your financial affairs in order, meaning that you have all of your bills paid on time with a reasonable amount left over, then you may be a candidate to take advantage of some of the offers from credit card companies.
If you like to travel, there are some credit card companies that will give you airline "points" or "mileage" by using their card. The creditor estimates that for every "free" ticket they give a customer that pays the entire balance every month (they lose money on this guy)they will be a "zillion" times compensated by the majority of credit users who only pay the minimum each month!
Here's what I mean...
I have a good friend who owns a small auto-repair business. He pays for all of his parts orders with one credit card that offers great mileage and bonuses. He then pays the entire balance off every month before any interest is charged! THAT IS THE KEY!!!!
Let me repeat...HE PAYS THE ENTIRE BALANCE OFF EVERY MONTH BEFORE INTEREST IS CHARGED! He receives lots of ticket and bonus offer from his credit card company. I'm sure they don't like a guy like that, but in reality, he is probably only one in a thousand anyway!
So, CREDIT AND DEBT...GOOD OR BAD?
It really boils down to how you use it!
Photo by: TaxRebate.org.uk