There are five primary kinds of debt, each with its own characteristics and dangers:
We will focus on Consumer debt (primarily, credit cards) in succeeding topics. Each of the other four kinds of debt has valid uses but also carries its own dangers.
Most individuals, couples, or families who buy a home will incur mortgage debt on their house. As a house is the single largest expense most people will have, it usually is not possible to purchase one without any debt. Additionally, there are some tax benefits to owning a home vs. renting an apartment; however, there are also many hidden costs (such as maintenance, upkeep, etc.).
Generally, property values tend to increase with time, so that a house is typically an appreciating asset (if well-maintained). There are exceptions based on changes in neighborhoods and overall economy. In the early 2000’s, a downturn in the economy left many borrowers “upside down” on their houses, meaning that they owed more on the house than it was worth. Many of these borrowers had overextended themselves in the original purchase due to lax lending policies on the part of banks and other lending institutions. As the economy worsened, people lost their jobs and could no longer make their house payments, and many houses were foreclosed on by the lenders.
There are many factors that go into determining which house to buy, but from the standpoint of being a Cautious Debtor, here are a couple that stand out:
Most automobiles decrease in value over time and with usage; as a result, unlike a house, a car should not be considered an investment. The Cautious Debtor will approach automobile loans with care and restraint.
“The cheapest car to drive is the one you already own.” — Dick Towner
The cost of college today is prohibitive for most students without incurring significant debt. However, the choice of college (in-state vs. out-of-state, community college vs. four-year university, private vs. public, etc.) will have a major effect on the debt load required. Two key realities to keep in mind concerning college debt are:
Going into business will usually require a certain amount of debt. With sufficient planning and a certain amount of “good luck” along the way, this debt will turn out to be a great investment. However, business debt is also a major contributing factor to bankruptcy and can have long-lasting financial impact. See below for the Good Sense position paper on bankruptcy.