What is debt?
Debt is owing money to another person or a financial institution. It is money you borrowed and promised to pay back. The amount owed usually grows over time, depending on the agreed-upon interest rate.
Types of debt
Installment debt is the technical term for such things as mortgages and other loans. You have a set payment schedule based on the amount of the loan and the interest rate. You make the same payment every month and have a deadline for when the debt must be repaid.
Revolving debt is more commonly referred to as credit card debt, though certain types of loans, such as Home Equity Lines of Credit (HELOCs), are also a form of revolving debt.
With revolving debt, there is no deadline for when the whole amount must be repaid, but you do have to keep making a minimum payment every month to avoid additional charges. There is usually a maximum limit for how much you can borrow at once. If you reach your limit, you have to pay down your debt before you can borrow more. The lower your balance and the quicker you pay it off, the less interest you will pay.
How do I eliminate debt?
Debt is usually paid back over time rather than as a single lump sum. The lender sets up an agreement for repayment under which a minimum amount is paid back every month. It is smarter, however, to pay back the debt as quickly as possible to reduce the amount of interest paid back on the loan.
Shown below are some ways you can make paying down your debt a little easier:
- Pay more than the minimum–If you can put extra cash toward your debt each month, do it.
- Pay biweekly–If you split your normal monthly payment into two equal halves and pay every two weeks instead of every month, you will pay off your debt faster and pay less in interest.
- Automate payments–Set up automatic payments through your online bank account so that you know your debt payment will go through at the same time every month or every two weeks.
Is debt ever a good thing?
Strangely enough, taking on debt may be a good idea in some situations as long as you can afford to pay it back in a timely manner.
While you should always be careful about borrowing money, in some cases, debt can help you be in a better financial position in the future, for example:
- If the debt can help you make more money.
- Many people need to take out loans to finance their education, which will help them get better jobs. People with bachelor’s degrees make about a million dollars more over the course of their lives than those with just high school diplomas.
- If taking on debt will allow you to make an investment that will provide for you later in life.
- You may need to take out a loan to start a business, buy a home, or make an investment. Taking out loans to accomplish such goals could lead to a bright future.
- If you need to start building or repairing your credit, using a credit card for small purchases each month and paying them off right away can help you increase your score over time.
Debt can pile up very quickly. If you don’t pay off your balance, you’ll accrue interest charges each month, plus any new debt you take on will start accruing interest as well. Your debt will only stop growing when you pay it off entirely, which becomes harder and harder the more you borrow. In fact, even the federal government has problems controlling its debt.
Remember to try your best to take on only good debt—debt that allows you to invest in a better financial future for you and your family–and to pay it off as quickly as possible.
- Debt is when you borrow money from a person or financial institution and have to pay it back.
- Debt grows over time because of interest.
- Debt can help you reach goals, such as going to college or buying a house.
- It’s easy to get in too deep; be sure you only borrow what you can easily pay back.
- Research your options before taking on debt to make sure you get the best rate available.
Different types of debt serve different purposes, and taking on debt may actually be beneficial to you in the long run. Be careful, however, about taking on more than you can handle. Shop around for the best interest rates, and always have a plan in place to ensure you pay off your debt quickly.
- Americans owe a total of $11.63 trillion in total debt.
- The last time there was no federal debt was in 1837.
- It took Montreal 30 years to pay off the cost of hosting the Summer Olympics in 1976.