What is Debt?

Debt is how much you borrow from banks, credit cards, friends, and family to pay for purchases you simply can not afford.

Ahh, debt. That vague, pesky number that you try not to think about, but do you know what those numbers really mean on your credit card statement? For many, your credit card debt doesn’t become an issue until you maxed out a credit card, can not pay the minimum, or get rejected by a bank for a new one. Let’s take a look a closer look at what your debt means now and how it could impact you in the future.

What is debt? Debt is simply an amount you borrow from other people (called Lenders) which you must pay back in the future. This typically happens when you spend more than you earn and do not pay off your credit card in full every month. However, people can also have debt when they make large purchases which they can not pay with out of savings, usually a car or house. Or if you experience a large unexpected expense that you can not afford – think a large car expense or medical bill.

Credit card debt is the most common… and most dangerous. The first thing to realize is: most people have credit card debt. Ask your friends, look to your family, people at your church, other parents are your kid’s school… people of all ethnicities, regions, and religions… rich and poor,  young and old… most people are in debt. Now that we have that settled, it’s even more important to realize that debt, especially credit card, is generally BAD. Credit cards are designed to allow you to spend more than you earn and only pay a small minimum every month. In the meantime, your debt is increasing and the bank is charging you high fees and interest. Needless to say that free flight you thought you could buy with “points” likely won’t happen.

Let’s pay down your debt! Consider Camila. Camila makes $20/hour at her job and takes home about $2,500/month after taxes. After $500/month in rent, $1000/month in food, $500/month in health insurance and $600/month in clothes and entertainment, she increases her credit card debt by $100/month or $1,200 by the end of the year. If Camila doesn’t spend another single dollar, she would expect to pay $200 in interest over the next year! How would you spend $200?

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