I should start by explaining (what I see as) the difference between consumer and non-consumer debt. Consumer debt includes: credit cards, financed appliances/furniture/gadgets/etc, and car loans. It’s debt for items that are meant to be used up and worn out. Non-consumer debt, in my book, is mortgages and student loans (or business loans, but it’s best if you don’t get loans for your business in your own name). Housing and education aren’t really things you wear out. They’re also lifetime investments.
So why is having consumer debt worse than having non-consumer debt? My definition gives away what I think is the biggest reason non-consumer debt is part of a lifetime investment. The other things may be investments in your life as well, but they’re often things that you can also buy without getting into debt.
Other reasons that come to mind why consumer debt is worse are:
1. They reflect irresponsiblity. This isn’t to say you can’t also be irresponsible with a mortgage or a student loan, but a person’s level of consumer debt often reflects their level of financial responsiblity.
For example, when we got married Micah had less than $850 in credit card debt (much of which was for our wedding bands, which I’d told him I’d pay for), and a pretty reasonable car loan on a sensible car. He had a lot of student loan debt, but his consumer debt reflected that he was, on the whole, used to living within his means.
2. Consumer debt often has higher interest rates. One of the downsides of consumer debt is that it often has higher interest rates. Higher interest rates mean you’re paying significantly more than the item actually cost. Even worse, credit card interest rates can skyrocket if you’re late on a payment, if you mess up financially in another area, or just because the company decides to change your rate.
3. Consumer purchases depreciate faster. One big reason not to buy a new car is that it’ll drop in value the moment it’s driven off the lot. Most purchases will lose value quickly, so that you could not recoup the loan by selling the item. If you’re just making minimum payments, your iPod may die before you’ve paid it off.
Houses and educations can also depreciate, but if you stay on top of your field or keep your house in good condition, then the initial purchase retains its value.
On the Other Hand
1. Debt is debt is debt. is debt. It limits your financial future, since part of your paycheck is always going to pay it off. Plus, the interest on long-term debts like mortgages and student loans can actually cost you a lot more than higher interest on smaller loans.
Just because they have the potential to be lifetime investments doesn’t mean you should get more of a loan than you need or can afford. Instead of being a tool for your future, they become a ball and chain.
Do you believe there are better and worse types of debt? Are there kinds one should avoid entirely?