Last weekend, while out of town, I made a decision that was not necessarily the brightest. After waiting in line at a particular clothing store, and swearing I was not going to give into the store’s gimmick of signing up for a charge card to save money, I failed. Yes, at this particular store, I fell for the gimmick of save “x” percentage when signing up for a charge card.
Now, I realize this is not necessarily the worst decision one has ever made, especially where credit is concerned; but this was none the less not the best move. Will I use this charge card? Yes as I shop at the store frequently. Will I save more money in the long run because of this charge card? According to the big fancy folder provided to me I will save money once a month. Is my credit forever ruined from this card? No, it is not; but I would argue the card is not going to help my credit score.
Take a moment and think about everything you know about individual credit. I know that in some public schools credit is “touched upon” during high school; but how much did you actually retain. I retained 0% of it. Now think of other ways you have learned about your credit. Does a certain commercial come to mind, or several commercials? Credit is so important, and yet very few people really understand how to “properly” use it.
Have you ever given thought to good versus bad credit? I am not referring to having a high credit score instead of a low credit score. I am referring to the items that are the driving force behind why your credit is either high or low. This is something that is taught in Personal Finance. Take a moment to think how silly it seems that someone would even take a Personal Finance class. Now that you are finished laughing, guess what, this was by far one of my most informative courses in junior college. In fact, I honestly believe this type of course would benefit everyone if it were mandated before receiving a high school diploma.
I mentioned before that I wanted to implement personal finance into my blog and it is because so many people have little or no education on personal finance. Even those of us with some training and education still get it wrong from time to time; case in point, my new fancy charge card. See here I am again, coming back to that silly charge card. Why do I have buyer’s remorse over signing up for it? Do I hear someone saying because it is an example of bad credit? Yes, you in the back, you are correct. This is a prime example of bad credit.
Bad Debt is often used to refer to the use of going into debt for depreciating assets. Essentially these “assets” do very little to improve your overall net worth. Now it is true that these purchases are at times necessary, and when properly utilized can work to help your credit.
Investopia states there are three examples of bad debt. Any ideas what three purchases are considered bad debt? The first one I am going to discuss is obvious as I have mentioned it several times. Charge/Credit cards to a particular store. Next item is also logical, credit cards in general. Finally, and brace yourself because we all have to go into debt for this item, car loans!
- Charge or Credit Cards to Specific Stores
We have all seen them and we have all been tempted to sign up for one. I am ashamed to admit I now have two active ones, although the other one is more of a credit card. Obviously the driving force behind the success, the company’s success not ours, with this type of debt is that we often need some of these items to survive. True, I loved some of my clothes from High School and College, but guess what they are either worn out or no longer fit. We are not a society that embraces everyday nudity, thank God! Purchasing clothing several times a year is a necessity for warmth, for work or school, for certain activities, and well for social acceptance.
So, if this is a necessity what makes it “bad debt?” Well how many clothes do you still have from five, ten, fifteen years ago? I can think of about five articles of clothing from the earlier part of past decade that I still own; one very worn out leather jacket (insert sad sigh here because I love it), one nice winter coat I only recently decided to wear, a beautiful blue dress I do not want to part with, my cheerleader uniform from junior high because you know I haven’t gained 40 lbs since I was 15, and a jacket from London. Beyond that when I clean out my closet I am going to (probably) peacefully accept that some of my once favorite items need to find a donation bin.
This type of debt is not limited to just clothing. It also extends to consumable goods and services. Has anyone seen the Wayfair Charge Card? As someone with the home decorating bug this one is also tempting. My words of advice “Stay away!” True, these are for items you might need such as a kitchen table or living room sofa, but these items lose value. If they didn’t lose value quickly then we wouldn’t see furniture a plenty on ever yard sale site for a fraction of the original purchase price. Now, there are some stores the offer reasonable purchase plans for some of these higher priced items. This is how we purchased our fridge. We had to make three large payments. So yes, there are times when you need to consider all options, especially when it’s November and your fridge decides it is time to stop working.
Overall the main advice here is buyer beware. Think before you sign up for that charge card. Ahem, Sunday Morning Glenna! If you pay it off immediately the reality is you will most likely survive, but all too often this is not the case.
- Credit Cards
Credit Cards are difficult and many companies understand the dilemma of using them. Personally we use them to buy everything, from our groceries to our miscellaneous purchases. The key however is that we pay them off immediately. Unfortunately for most people, this is far easier said than done.
The high interest rates and added fees make credit cards detrimental to your overall financial health. Yes, that low introductory rate is wonderful, but after 18 months it because 23%. Okay maybe not 23%, each amount is different. My first real credit card, not the bank one with a $500 limit, had the potential to make or break me. For over a year I paid way too many fees, both in interest and penalties. Just when I thought I would pay it down, I would receive a new statement that was almost more than I originally paid. No matter how much I paid on it I could never seem to bring down the balance. Want to know the sad part? The balance was at most $500. As a struggling “college” student, I add that because I am now just a “struggling” adult, this amount seemed impossible to pay off. Laugh, I am, because I know people have far higher credit amounts keeping them up at night. The point is though; even this small amount was hard to pay off. Finally, I used student loans to pay it off. Advisable? Probably not. Helpful? Yes! That sucker was draining me.
Just as mentioned above, when using that wonderful piece of plastic be cautious! Most of us have to use it from time to time to pay for items we cannot afford right now. We all do it, the important thing though is to understand credit cards and how harmful or helpful they are at times.
- Car Loans
Okay, this one is probably the toughest. Most of us relay on personal transportation to get from point A to point B! Honestly, I would love to use a train system, or if necessary a bus, but mainly a train. In my community however this is not an option. Also not an option is carpooling. I am going in the opposite directions of most people.
I have not had a car payment for over five years and it has been amazing. My little car tries its best to keep up. It is sun faded and now has a beautiful scratch on the bumper. Good news, I was not at fault! Seriously, my car was parked and the engine was off. I was waiting for my pizza when suddenly my car started to move. This happened this past week by the way. Obviously I am okay, as is the other driver. My only dilemma now is do I repaint the rest of the car so the updated bumper does not look out of place? I am also thinking how much life is left in this car. I would love for it to last another 10 years, but it is not a practical, reliable vehicle. Okay it is mostly reliable, but in the winter months I am too scared to drive it. On the other end, we are not financially at a place where we want a car payment.
The little devil on my one shoulder says, “Buy one right now, you know you want one!” The little angle on the other shoulder says, “Wait because you know what vehicle you want and cannot afford it right not. Try to save money first.” Why do I have this internal conflict? Simple, cars are a ridiculous example of a depreciating item.
Basically what I am saying here but failing to get at is this, yes we all need transportation. This is sometimes an unavoidable debt. Please take a moment though before jumping into a new purchase. Ask yourself, “If I lose my job can I pay for this Audi?” Also consider, “Is this the best interest rate possible?” If you must have the fancy of the fanciest vehicles, consider ways to limit the amount of interest paid on it by making additional payments, having a larger down payment, or finding lower interest rates. Essentially, do your research.
Credit is such a tricky subject. Is your head spinning, because mine kind of is spinning and I wrote this post! It is important to understand though because it can have such a large impact on your life. There are debts that are considered good credit, which I plan to discuss later. Furthermore, there are correct ways to manage bad debt to work in your favor. Credit cards, which are so frightening, can help you when properly used. Charge cards are convenient and again when properly used might save you some money. Finally, car loans, when paid off quickly will help improve your credit. Ultimately it is all about finding the right balance for you, and taking time to educate yourself on personal finance.